Question

On January 1, 2012, Neal Corporation acquired equipment at a cost of $720,000. Neal adopted the sum-of-the-years'-digits method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no residual value. At the beginning of 2015, a decision was made to change to the straight-line method of depreciation for this equipment. The depreciation expense for 2015 would be?

1) $37,500
2) $60,000
3) $90,000
4) $144,000

Answer 1

To calculate the 2015 depreciation expense after changing from the sum-of-the-years'-digits to the straight-line method, one must first determine the book value as of the end of 2014 and then spread this cost evenly over the remaining five years of the equipment's life. Without the depreciation figures for previous years, a precise expense value for 2015 cannot be determined.

Step-by-step explanation:

The student is asking about calculating depreciation expense using a different method after a change in accounting policy. Neal Corporation initially used the sum-of-the-years'-digits method and is changing to the straight-line method in 2015. To calculate the 2015 depreciation expense, we need to determine the book value of the equipment as of December 31, 2014, and then divide the remaining book value by the remaining useful life. Assuming the sum-of-the-years'-digits depreciation for the years 2012, 2013, and 2014 has been recorded, Neal Corporation must spread the remaining cost evenly over the remaining five years.

To find the 2015 depreciation expense:

1. Calculate total depreciation up to the end of 2014 using the sum-of-the-years'-digits method.
2. Subtract this total depreciation from the original cost to get the book value at the end of 2014.
3. Divide the book value at the end of 2014 by the remaining life (5 years) to find the annual depreciation expense for 2015 onward under the straight-line method.

Since the actual figures aren't provided for the depreciation accumulated up to the end of 2014, we are unable to give the precise figure for the 2015 depreciation expense.