Question

On January 1, Year 1, Li Company purchased an asset that cost $25,000. The asset had an expected useful life of five years and an estimated salvage value of $5,000. Li uses the straight-line method for the recognition of depreciation expense. At the beginning of the fourth year, the company revised its estimated salvage value to $2,500. What is the amount of depreciation expense to be recognized during Year 4?

Multiple Choice

a. $6,500

b. $10,500

c. $5,250

d. $4,000

Answer 1

The depreciation expense to be recognized during Year 4 for Li Company is $5,250 after adjusting for the revised estimated salvage value.

Step-by-step explanation:

The depreciation expense for Year 4 after the revision of the estimated salvage value can be calculated as follows:

• Calculate the total depreciation for the first three years using the original salvage value.
• Deduct the accumulated depreciation from the cost to get the book value at the beginning of Year 4.
• Spread the remaining book value over the remaining useful life after adjusting for the new salvage value.

Original depreciation per year: (Cost - Original salvage value) / Useful life = ($25,000 - $5,000) / 5 = $4,000

Depreciation for the first 3 years: $4,000 * 3 = $12,000

Book value at beginning of Year 4: Cost - Accumulated depreciation = $25,000 - $12,000 = $13,000

New depreciation per year: (Book value - New salvage value) / Remaining life = ($13,000 - $2,500) / 2 = $5,250

Therefore, the depreciation expense to be recognized during Year 4 is $5,250.