Question

On January 1, 2019, Neal Corporation acquired equipment at a cost of $840,000. Neal adopted the sum-of-the-years'-digits method of depreciation for this equipment and had been recording depreciation over an estimated life of eight years, with no residual value. At the beginning of 2022, a decision was made to change to the straight-line method of depreciation for this equipment. The depreciation expense for 2022 would be

a. $60,000
b. $70,000.
c. $80,000
d. $90,000

Answer 1

The depreciation expense for 2022 would be $70,000. Therefore, the correct option is B.

Step-by-step explanation:

To determine the depreciation expense for 2022, we first need to calculate the remaining book value of the equipment at the beginning of 2022. Using the sum-of-the-years'-digits method, we calculate the accumulated depreciation after three years:

1. Year 1: 8/36 * $840,000 = $186,667
2. Year 2: 7/36 * $840,000 = $163,333
3. Year 3: 6/36 * $840,000 = $140,000

The accumulated depreciation after three years is $490,000. So, the remaining book value at the beginning of 2022 is $840,000 - $490,000 = $350,000.

Since the equipment now has a remaining life of 5 years (8 - 3), we can divide the remaining book value by the remaining life to calculate the straight-line depreciation expense for 2022: $350,000 / 5 = $70,000.