Question

Able Towing Company purchased a tow truck for $60,000 on January 1 of its first year. The truck was originally depreciated on a straight-line basis over 10 years with an estimated salvage value of $12,000. At the end of the third year, before year-end adjusting entries have been recorded, the company decided to revise the estimated life of the truck to a total of 6 years and to change its estimated salvage value to $2,000. How much depreciation expense should be recorded for the third year?

Answer 1

The depreciation expense for the third year would be $13,333.33.

Step-by-step explanation:

To calculate the depreciation expense for the third year, we need to consider the revised estimated life of the tow truck and its new estimated salvage value. The initial estimated life was 10 years with a salvage value of $12,000. However, after three years, the company decided to revise the estimated life to 6 years and the salvage value to $2,000.

To calculate the depreciation expense for the third year, we can use the straight-line depreciation method. This method evenly distributes the cost of the asset over its estimated life. The depreciation expense for each year is determined by subtracting the salvage value from the original cost and dividing it by the estimated life of the asset.

In this case, the original cost of the tow truck was $60,000. After three years, the accumulated depreciation would be (3/10) * $60,000 = $18,000. The revised estimated life is 6 years, so the remaining life of the truck is 6 - 3 = 3 years. The remaining cost of the truck is $60,000 - $18,000 = $42,000. The depreciation expense for the third year would be ($42,000 - $2,000) / 3 = $13,333.33.