Question

Marigold Company purchased equipment on January 1, 2019, for $72,240 with an estimated salvage value of $20,160 and estimated useful life of 8 years. On January 1, 2021, Marigold decided the equipment will last 12 years from the date of purchase. The salvage value is still estimated at $20,160. Using the straight-line method the new annual depreciation will be:

Answer 1

The new annual depreciation for the Marigold Company's equipment, using the straight-line method, will be $3,906 starting January 1, 2021.

Step-by-step explanation:

The student is asking how to recalculate the annual depreciation expense for a piece of equipment using the straight-line method after the estimated useful life has been extended. Given that the Marigold Company purchased the equipment on January 1, 2019, for $72,240 with an estimated salvage value of $20,160 and an initial estimated useful life of 8 years, we can first calculate the depreciation up to January 1, 2021.

For the first two years, the annual depreciation would be ($72,240 - $20,160) ÷ 8 years which equals $6,510 each year. By January 1, 2021, the book value of the equipment would be $72,240 - (2 × $6,510) = $59,220.

Since Marigold Company has decided that the equipment will last 12 years from the date of purchase, starting January 1, 2021, we must spread the remaining book value over the remaining life of the equipment. The remaining useful life is now 12 years - 2 years = 10 years. Therefore, the new annual depreciation expense from January 1, 2021, will be ($59,220 - $20,160) ÷ 10 years which equals $3,906 per year.