Question

The Donut Stop acquired equipment for $23,000. The company uses straight-line depreciation and estimates a residual value of $3,400 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 $2,000 from the original estimate of $3,400.Required:Calculate how much The Donut Stop should record each year for depreciation in years 3 to 6.Cost of the equipment:Less: accumulated depreciation (year 1 & 2):Book value, end of year 2:Less: new residual value:New depreciable cost:Remaining service life:Annual depreciation in years 3 to 6

Answer 1

$2,400

Step-by-step explanation:

Cost of equipment = $23,000

Residual value = $3,400

Useful life = 4 year

Formula for Annual Depreciation will be:

Annual depreciation = (Cost price - Residual value)/Useful life

Hence,

= (23,000 - 3,400)/4

= 19,600/4

= $4,900

The Accumulated depreciation for year 1 and year 2 will be

= 4,900 x 2

= $9,800

Cost of equipment 23,000

Less : Accumulated depreciation for year 1 and year 2 (9,800)

Book value, end of year 2 13,200

Less : Residual value (2,000)

New depreciable cost 11,200

Remaining service life 4

Annual depreciation in year 3 to 6 (11,200/4) $2,400