Question

The Hilton Skating Club used straight-line depreciation for a used Zamboni ice-resurfacing machine that cost $46,500, under the assumption it would have a four-year life and a $5,600 trade-in value. After two years, the club determined that the Zamboni still had three more years of remaining useful life, after which it would have an estimated $4,030 trade-in value.

Required:
1. Calculate the Zamboni’s book value at the end of its second year.
2. Calculate the amount of depreciation to be charged during each of the remaining years in the Zamboni’s revised useful life.

Answer 1

The book value of the Zamboni at the end of the second year is $26,050. Over the remaining three years, an annual depreciation of $7,340 should be recorded. The correct answer is option 1.

Step-by-step explanation:

Calculating Book Value and Depreciation

To calculate the Zamboni’s book value at the end of its second year, we need to apply the straight-line depreciation method. Originally, the Zamboni had a cost of $46,500 with an expected life of four years and a $5,600 trade-in value.

The annual depreciation expense is calculated by subtracting the trade-in value from the cost and dividing by the useful life: ($46,500 - $5,600) ÷ 4 = $10,225. Therefore, after two years, the accumulated depreciation is 2 × $10,225 = $20,450. The book value is the original cost minus the accumulated depreciation: $46,500 - $20,450 = $26,050.

With the updated information that the Zamboni has a remaining useful life of three more years and a new estimated trade-in value of $4,030, we need to calculate the new annual depreciation expense. We subtract the new trade-in value from the current book value and divide by the remaining life: ($26,050 - $4,030) ÷ 3 = $7,340. Consequently, the depreciation to be charged during each of the remaining three years is $7,340.