Question

On January 2, Year 1, Collins Company purchased equipment costing $43,200. The equipment has an estimated salvage value of $6,120 and an estimated useful life of 20 years.

Collins Company uses straight-line depreciation. During Year 4, new information suggests that the equipment will have a total useful life of 9 years and a revised salvage value of $5,760.
Required:
1. Compute depreciation expense for Year 4.
2. Compute the book value of the equipment at the end of Year 4.

Answer 1

The depreciation expense for Year 4 is $6,240, and the book value of the equipment at the end of Year 4 is $25,336.

Step-by-step explanation:

To compute the depreciation expense for Year 4, we first need to calculate the annual depreciation using the straight-line method. The formula for straight-line depreciation is:

Depreciation Expense = (Cost - Salvage Value) / Useful Life

For the first three years, the depreciation expense is:

Depreciation Expense = ($43,200 - $6,120) / 20 = $1,608 per year

Since new information suggests that the equipment will have a total useful life of 9 years, the remaining useful life in Year 4 is 9 - 3 = 6 years. The revised salvage value is $5,760. Therefore, the depreciation expense for Year 4 is:

Depreciation Expense = ($43,200 - $5,760) / 6 = $6,240 per year

To compute the book value of the equipment at the end of Year 4, we subtract the total depreciation expense for the first 4 years from the initial cost:

Book Value = Cost - (Depreciation Expense × Number of Years)

Book Value = $43,200 - ($1,608 × 3 + $6,240) = $25,336