Question

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. Sophia 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 $10,000. What is the amount of depreciation expense to be recognized during Year 4

Answer 1

$21,000

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

= ($100,000 - $20,000)/5

= $16,000

At the beginning of the 4th year, the carrying amount of the asset

= $100,000 - 3($16,000)

= $52,000

Since the company revised its estimated salvage value to $10,000, annual depreciation will be

= ($52,000 - $10,000)/2

= $21,000