Question

On January 2, Year 1, Ramirez Company purchased equipment costing $54,000. The equipment has an estimated salvage value of $7,920 and an estimated useful life of 8 years. Ramirez Company uses straight-line depreciation. On January 5 of Year 5, new information suggests that the equipment will have a total useful life of 7 years and a revised salvage value of $5,760.

1. Compute depreciation expense for Year 5.
2. Compute the book value of the equipment at the end of Year 5.

Answer 1

The depreciation expense for Year 5 is $8,400, calculated by adjusting for the revised estimated useful life and salvage value. The book value of the equipment at the end of Year 5 is $22,560 after accounting for the depreciation expense of Year 5.

Step-by-step explanation:

To calculate the depreciation expense for Year 5 after the adjustment, we first need to determine the book value of the equipment at the end of Year 4. The original annual depreciation is calculated using the initial estimated useful life (8 years) and salvage value ($7,920), which is ($54,000 - $7,920) / 8 = $5,760 per year. By the end of Year 4, the equipment has been depreciated for 4 years, which means the accumulated depreciation is $5,760 x 4 = $23,040. Therefore, the book value at the end of Year 4 is $54,000 - $23,040 = $30,960.

With the new information, the remaining book value at the end of Year 4 needs to be spread over the remaining life of 3 years (7-year revised life minus 4 years elapsed). The revised salvage value is $5,760. The new annual depreciation for Years 5 to 7 is ($30,960 - $5,760) / 3 = $8,400. Thus, the depreciation expense for Year 5 is $8,400.

To compute the book value at the end of Year 5, we subtract the Year 5 depreciation from the book value at the end of Year 4: $30,960 - $8,400 = $22,560. Therefore, the book value of the equipment at the end of Year 5 is $22,560.