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29 January, 12:30

Equipment costing $40,000 with a salvage value of $8,000 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 5 years and no change in the salvage value, the depreciation expense for Year 3 would be

a. $4,800.

b. $10,667.

c. $8,000.

d. $6,400.

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Answers (1)
  1. 29 January, 16:28
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    The equipment originally cost 40,000 and has a salvage value of 8,000, which means that the amount that can be depreciated is 32,000. It has a life of 8 years and follows a straight line method so the yearly depreciation would be 32,000/8 = 4,000.

    The depreciation for the first 2 years is 4000*2 = 8,000

    So the book value of the asset is 40,000-8000 = 32,000

    Since according to the new estimate the total life is 5 years, and 2 years have already passed the remaining life of the asset is 3 years. Also since there is no change in salvage value the amount that can be depreciated is 32,000-8,000 = 24,000

    To find out the deprecation in year 3 we will divide 24,000 by the reaming life which is 3.

    24,000/3 = 8,000

    The depreciation expense in year 3 would have been $8,000
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