Question

the donut stop acquired equipment for $26,000. the company uses straight-line depreciation and estimates a residual value of $4,000 and a four-year service life. at the end of the second year, the company estimates that the equipment will be useful for four additional years, for a total service life of six years rather than the original four. at the same time, the company also changed the estimated residual value to $1,600 from the original estimate of $4,000. required: calculate how much the donut stop should record each year for depreciation in years 3 to 6.

Answer 1

After revising the useful life and residual value at the end of the second year, The Donut Stop should record an annual depreciation of $3,350 for each of the years 3 to 6.

Step-by-step explanation:

The calculation of depreciation requires adjusting the amounts after the useful life and residual value have changed in the second year. After two years of using the original estimates, the depreciable base needs to be recalculated to spread the remaining amount over the remaining useful life.

Depreciation for Year 1 and 2:

Original Cost: $26,000
Original Residual Value: $4,000
Original Useful Life: 4 years
Annual Depreciation: ($26,000 - $4,000) ÷ 4 = $5,500 per year
Accumulated Depreciation after 2 years: $5,500 x 2 = $11,000

New Depreciation from Year 3 to 6:

Book Value at end of Year 2: $26,000 - $11,000 = $15,000
New Residual Value: $1,600
New Remaining Life: 4 years
New Annual Depreciation: ($15,000 - $1,600) ÷ 4 = $3,350 per year

Therefore, The Donut Stop should record an annual depreciation of $3,350 for each of the years 3 to 6.