Question

An asset was purchased for $125,000 on January 1, Year 1, and originally estimated to have a useful life of 10 years with a residual value of $10,500. At the beginning of the third year, it was determined that the remaining useful life of the asset was only 4 years with a residual value of $2,800. Compute the third-year depreciation expense using the revised amounts and straight-line method.

a. $25,325.00
b. $24,825.00
c. $25,825.00
d. $23,825.00

Answer 1

To find the third-year depreciation expense using the straight-line method with revised estimates, we first calculate the depreciation already charged, then determine the new annual depreciation based on the adjusted book value and remaining life, which is $24,825.00 for the third year.

Step-by-step explanation:

To compute the third-year depreciation expense using the straight-line method and the revised estimates for the remaining useful life and residual value, we need to follow these steps:

1. Calculate total depreciation up to the end of the second year, using the original useful life and residual value.
2. Determine the book value at the beginning of the third year.
3. Calculate the new annual depreciation expense based on the revised remaining useful life and new residual value.

So, let's put these steps into action:

1. Original annual depreciation = (Cost - Original residual value) / Original useful life = ($125,000 - $10,500) / 10 years = $11,450 per year
2. Total depreciation for 2 years = $11,450 * 2 = $22,900
3. Book value at the beginning of year 3 = Cost - Accumulated depreciation = $125,000 - $22,900 = $102,100
4. New annual depreciation = (Book value - Revised residual value) / Remaining useful life = ($102,100 - $2,800) / 4 years = $24,825 per year

Therefore, the third-year depreciation expense is $24,825.00.