At the beginning of 2012, Mazzaro Company acquired equipment costing $120,000. It was estimated that this equipment would have a useful life of 6 years and a salvage value of $12,000 at that time. The straight-line method of depreciation was considered the most appropriate to use with this type of equipment. Depreciation is to be recorded at the end of each year.

During 2014 (the third year of the equipment's life), the company's engineers reconsidered their expectations, and estimated that the equipment's useful life would probably be 7 years (in total) instead of 6 years. The estimated salvage value was not changed at that time. However, during 2017 the estimated salvage value was reduced to $5,000. Indicate how much depreciation expense should be recorded each year for this equipment.

Depreciation expense for

2012 and 2013 - $18,000

2014, 2015, 2016 - $14,400

2017 - $17,900

Explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset

Mathematically,

Depreciation = (Cost - Salvage value) / Estimated useful life

Depreciation at start

= (120,000 - 12,000) / 6

= $18,000

This amount would be recorded as depreciation for 2012 and 2013.

The carrying amount of the asset as at start of 2014

= $120,000 - 2 ($18,000)

= $84,000

During 2014 (the third year of the equipment's life), the company's engineers reconsidered their expectations, and estimated that the equipment's useful life would probably be 7 years (in total) instead of 6 years. It means that the asset has a remaining life of 5 years instead of 4

Depreciation = ($84,000 - $12,000) / 5

= $14,400

This will be the depreciation charge for 2014, 2015 and 2016.

The carrying value of the asset as at end of 2016,

= $84000 - 3 (14,400)

= $40,800

During 2017 the estimated salvage value was reduced to $5,000. The remaining useful life is 2 years

Depreciation for 2017

= ($40,800 - $5,000) / 2

= $17,900

Depreciation charge:2012 $18,000

Depreciation charge:2013 $18,000

Depreciation charge:2014 $14,400

Depreciation charge:2015 $14,400

Depreciation charge:2016 $14,400

Depreciation charge:2017 $17,900

Depreciation charge:2018 $17,900

Explanation:

Depreciation = cost-salvage value/useful life

cost is $120,000

salvage value is $12,000

useful life is 6 years

Depreciation charge = ($120,000-$12,000) / 6=$18,000

The $18,000 depreciation applies to both 2012 and 2013

Revised depreciation in 2014 = ($120,000 - ($18,000*2) - $12,000) / (7-2) = $14400

The depreciation charge of $14400 applies to 2014.2015 and 2016

In 2017 revised depreciation=$120,000 - ($18,000*2) - ($14,400*3) - $5000 / (7-5) = $17900

The depreciation charge of $17,900 applies to 2017 and 2018