Question

on january 1, year 1, li company purchased an asset that cost $110,000. the asset had an expected useful life of five years and an estimated salvage value of $22,000. li uses the straight-line method for the recognition of depreciation expense. at the beginning of the fourth year, the company revised its estimated salvage value to $11,000. what is the amount of depreciation expense to be recognized during year 4?

Answer 1

The depreciation expense for Year 4, after revising the salvage value to $11,000, is $28,600, calculated by adjusting the remaining depreciable base over the remaining useful life of the asset.

Step-by-step explanation:

When calculating the depreciation expense for Year 4, we must adjust for the change in estimated salvage value at the beginning of the fourth year. The cost of the asset was $110,000, with an original estimated salvage value of $22,000, resulting in a depreciable base of $88,000 over five years. By the end of Year 3, the company had recognized $52,800 in depreciation expenses (3 years × $17,600/year).

With the revised salvage value of $11,000, the remaining depreciable base at the start of Year 4 is $57,200 ($110,000 - $52,800), which needs to be spread over the remaining 2 years of useful life. Thus, the new annual depreciation expense for Year 4 (and Year 5) becomes $28,600.