A company used straight-line depreciation for equipment that cost $12,000, had a salvage value of $2,000, and a 5-year useful life. At the beginning of year 4 of its useful life, the estimate of the salvage value was reduced to $1,200 and its total useful life was increased to 6 years. The amount of depreciation that will be recorded during each of the remaining years of its useful life is:

A. $2,000

B. $6,000

C. $1,600

D. $2,400

The answer is C

Explanation:

The formula for straight-line depreciation is:

(Cost of the asset minus salvage value) : number of useful life.

Cost of the asset is $12,000

Salvage value is $2,000

Number of useful life is 5 years.

Therefore, we have:

($12,000 - $2,000) : 5

= $2,000.

Accumulated depreciation balance at the end of the third year is $6,000 ($2,000 x 3).

So the net book value of the asset at the beginning of fourth year is $6,000 ($12,000 - $6,000)

The new salvage value is $1,200 and the number of year has changed to 6 years.

3 years have has been used. So the new useful life will be 3 years (the new 6 years minus the 3years that has gone).

We now have:

($6,000 - $1,200) : 3 years

$1,600 as the new depreciation