Question

Equipment was purchased at the beginning of 2012 for $680,000. At the time of its purchase, the equipment was estimated to have a useful life of six years and a salvage value of $80,000. The equipment was depreciated using the straight-line method of depreciation through 2014. At the beginning of 2015, the estimate of useful life was revised to a total life of eight years and the expected salvage value was changed to $50,000. The amount to be recorded for depreciation for 2015, reflecting these changes in estimates, is?

1) $41,250
2) $66,000
3) $76,000
4) $78,750

Answer 1

The revised depreciation expense for the equipment for the year 2015 is $66,000, after adjusting for the accumulated depreciation till 2014 and the change in the salvage value and the useful life of the asset.

Step-by-step explanation:

The calculation of the new depreciation expense for 2015 after the revision of the useful life and salvage value of the equipment requires a few steps. First, calculate the depreciation expense for the years 2012-2014 using the original estimates. This is done by subtracting the estimated salvage value ($80,000) from the purchase price ($680,000) and dividing by the original useful life (6 years):

Depreciation per year (2012-2014) = ($680,000 - $80,000) / 6 = $600,000 / 6 = $100,000 per year.

Total depreciation for 3 years = $100,000 * 3 = $300,000.

Next, subtract the accumulated depreciation till 2014 from the purchase price and then subtract the revised salvage value to find the depreciable base for the remaining life, which is now revised to 8 years total.

Remaining depreciable base = $680,000 - $300,000 - $50,000 = $330,000.

The remaining life of the equipment after 2014 is 8 - 3 = 5 years. So, the new annual depreciation expense from 2015 will be:

New annual depreciation (2015 onwards) = $330,000 / 5 = $66,000.

Therefore, the depreciation expense for 2015 reflecting the changes in the estimate should be $66,000.