Question

The Hilton Skating Club used straight-line depreciation for a used Zamboni ice-resurfacing machine that cost $45,500, under the assumption it would have a four-year life and a $5,400 trade-in value. After two years, the club determined that the Zamboni still had three more years of remaining useful life, after which it would have an estimated $3.970 trade-in value. Required: 1. Calculate the Zamboni's book value at the end of its second year. Zamboni's book value 2. Calculate the amount of depreciation to be charged during each of the remaining years in the Zamboni's revised useful life. Amount of depreciation

Answer 1

Let's go through these calculations step by step:

1. Book Value at the end of the second year

The initial cost of the Zamboni was $45,500 and it was expected to have a trade-in value of $5,400 after 4 years. This gives us a total depreciation amount of $45,500 - $5,400 = $40,100 over the course of 4 years.

With straight-line depreciation, the Zamboni depreciates by an equal amount each year. So, its annual depreciation would be $40,100 / 4 = $10,025 per year.

After two years, the Zamboni would have depreciated by 2 * $10,025 = $20,050.

So, the book value at the end of the second year would be the initial cost minus the amount depreciated so far: $45,500 - $20,050 = $25,450.

2. Depreciation for each of the remaining years

Now, the club has determined that the Zamboni has three more years of useful life, and it will have a trade-in value of $3,970 at the end of that period. So, the total depreciation over the next three years would be the current book value minus the future trade-in value: $25,450 - $3,970 = $21,480.

The annual depreciation for each of the next three years, using straight-line depreciation, would be $21,480 / 3 = $7,160.

So, the Zamboni would depreciate by $7,160 each year for the next three years under the new assumptions.