Question

Monty Corp. purchased a piece of equipment for $75,300. It estimated an 8-year life and a $1,200 salvage value. At the end of year four (before the depreciation adjustment), it estimated the new total life to be 10 years and the new salvage value to be $23,011. Compute the revised annual depreciation. (Round answer to 0 decimal places, e.g. 5,275.)

Answer 1

To calculate Monty Corp.'s revised annual depreciation, the book value at the end of year four was determined. After that, the revised depreciable cost was calculated by subtracting the new salvage value, and this amount was divided by the remaining life. The revised annual depreciation is $2,540 for the next six years.

Step-by-step explanation:

To compute the revised annual depreciation for Monty Corp.'s equipment, the depreciable cost needs to be adjusted at the end of year four. To begin, calculate the amount of depreciation that has already been taken (4 years) and then adjust the remaining book value minus the new salvage value over the remaining useful life. Here is the step-by-step process:

• Calculate total depreciation after 4 years:
  Original annual depreciation = (Cost - Original Salvage Value) / Useful Life = ($75,300 - $1,200) / 8 = $9,262.50 per year
  Total depreciation after 4 years = $9,262.50 * 4 = $37,050
• Determine book value at end of year four:
  Book Value = Original Cost - Accumulated Depreciation = $75,300 - $37,050 = $38,250
• Compute revised depreciable cost:
  Revised depreciable cost = Book Value - New Salvage Value = $38,250 - $23,011 = $15,239
• Divide revised depreciable cost by remaining life to find new annual depreciation:
  New annual depreciation = Revised depreciable cost / Remaining Life (New Total Life - 4 years) = $15,239 / (10 - 4) = $2,540

Therefore, Monty Corp. will record an annual depreciation expense of $2,540, which is the revised annual depreciation amount for the next six years.