Question

The Donut Stop acquired equipment for $10,000. The company uses straight-line depreciation and estimates a residual value of $2,000 and a four-year service life. At the end of the second year, the company estimates that the equipment will be useful for four additional years, for a total service life of six years rather than the original four. At the same time, the company also changed the estimated residual value to $1,000 from the original estimate of $2,000. Calculate how much The Donut Stop should record each year for depreciation in years 3 to 6.

Answer 1

Cost of Equipment: $10,000

Less Accumulated Depreciation ($10,000 - $2,000 / 4*2): $4,000

= Book Value (End of Year 2): $6,000

Less New Residual Value: $-1,000

= New Depreciated Cost: $5,000

Remaining Service Life: 4

Annual Depreciation in Years 3 to 6 ($5,000 / 4): $1,250