Question

When originally purchased, a vehicle costing $24,840 had an estimated useful life of 8 years and an estimated salvage value of $2,600. after 4 years of straight-line depreciation, the asset's total estimated useful life was revised from 8 years to 6 years and there was no change in the estimated salvage value. the depreciation expense in year 5 equals:?

Answer 1

Originally, the depreciation is the original price of $24,840 minus the salvage value of $2600 divided by the number of years of useful life which was 8 years. This means that (24840-2600)/8 = $2780 was being written off each year, so, at the end of year 4, (4*2780) = $11, 120 was written off. This leaves the value of the car at (24840 - 11120) = $13720 at the start of year 5. Since we are moving from 8 years to 6 years useful life, there are only 2 more years over which we can depreciate. The current value at the end of year 4 minus the salvage value, then divided by the 2 years useful life remaining gives us a depreciation expense of (13720 - 2600)/2 = $5560 in year 5