On January 1, Jamaica Company purchased equipment for $18,000. The estimated salvage value is $2,000 and the estimated useful life is 5 years. On December 31 of the third year, before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment by one year giving it a total life of 6 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for the third year?

Depreciation expense on third year is $2,400

Explanation:

First, we must compute the depreciation expense for the first 2 years.

($18,000 - 2,000) / 5years = $3,200 depreciation expense per year.

Second, let's compute the net book value before the adjustment.

$3,200 x 2 years = $6,400 (total depreciation for 2 years)

$18,000 - $6,400 = $11,600 (Net book value before adjustment)

Finally we can now compute the Depreciation expense on the third year.

($11,600 - $2,000) / 3+1

$9,600/4 = $2,400 (new depreciation expense on third year)