Question

Sheridan Towing Company purchased a tow truck for $174,000 on January 1, 2020. It was originally depreciated on a straight-line basis over 10 years with an assumed salvage value of $36,000. On December 31, 2022, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2022) and the salvage value to $5,000. What was the depreciation expense for 2022?

Select answer from the options below:
a. $43,500.
b. $18,000.
c. $14,400.
d. $35,350.

Answer 1

The depreciation expense for Sheridan Towing Company for the year 2022 is $35,350 (option c) , after revising the salvage value to $5,000 and the remaining depreciable life to 4 years.

Step-by-step explanation:

The question relates to calculating the depreciation expense for Sheridan Towing Company for the year 2022 after they changed their depreciation assumptions for the tow truck. Initially, the truck was depreciated over 10 years with a salvage value of $36,000. This would amount to an annual depreciation of (Cost - Salvage Value) / Lifespan, i.e., ($174,000 - $36,000) / 10 = $13,800. By the end of 2021, accumulated depreciation would be $13,800 x 2 = $27,600.

However, at the end of 2022, the company changed the remaining life to 4 years and the salvage value to $5,000. To calculate the new depreciation expense, we first need to find the book value as of the end of 2021, which is $174,000 - $27,600 = $146,400. The remaining depreciable amount is then $146,400 - $5,000 = $141,400. Since the remaining life is 4 years, including 2022, the annual depreciation becomes $141,400 / 4 = $35,350. Thus, the depreciation expense for 2022 is $35,350.