Question

On January 1, the Matthews Band pays $67,400 for sound equipment. The band estimates it will use this equipment for five years and after five years it can sell the equipment for $2,000. Matthews Band uses straight-line depreciation but realizes at the start of the second year that this equipment will last only a total of three years. The salvage value is not changed.

Compute the revised depreciation for both the second and third years.
Book value at point of revision _____
Remaining depreciable cost _____
Depreciation per year for years 2 and 3 _____

Answer 1

The Matthews Band revises its equipment depreciation schedule after one year, resulting in a book value at revision of $54,320. The remaining depreciable cost is calculated to be $52,320, and the annual depreciation for the second and third years is set at $26,160.

Step-by-step explanation:

When the Matthews Band initially purchased the equipment, they planned to use it for five years with a salvage value of $2,000. This means the depreciable cost was $67,400 (purchase price) - $2,000 (salvage value) = $65,400. Using straight-line depreciation, they would depreciate it by $65,400 / 5 years = $13,080 per year for the first year. However, at the start of the second year, they revised the useful life to three total years instead of five, but the salvage value remained the same.

At the start of the second year, the book value of the equipment would be its original cost minus one year of depreciation: $67,400 - $13,080 = $54,320. Now, the revised remaining depreciable cost is the book value at the start of the second year minus the salvage value: $54,320 - $2,000 = $52,320. This amount will be depreciated over the remaining two years, which gives us a revised annual depreciation of $52,320 / 2 = $26,160 for both the second and third years.

Therefore, at the point of revision, the book value is $54,320. Remaining depreciable cost is $52,320. The depreciation per year for years 2 and 3 is $26,160.