Question

Equipment costing $20,000 with a salvage value of $4,000 and an estimated life of 8 years has been depreciated using the straight-line method for 2 years. Assuming a revised estimated total life of 6 years, and no change in the salvage value, the depreciation expense for Year 3 would beA. $4,000.B. $2,667.C. $3,000.D. $2,000

Answer 1

C. $3,000

Step-by-step explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset

Mathematically,

Depreciation = (Cost - Salvage value)/Estimated useful life

Given that On January 1, Year 1, Sophia Company purchased an asset that cost $100,000. The asset had an expected useful life of five years and an estimated salvage value of $20,000,

Annual depreciation

= ($20,000 - $4,000)/8

= $2,000

At the beginning of the 3rd year, the carrying amount of the asset

= $20,000 - 2($2,000)

= $16,000

Since the company revised its estimated total life of 6 years, annual depreciation will be (including year 3)

= ($16,000 - $4,000)/4

= $3,000