This information pertains to equipment owned by Brigade Company. Cost of equipment $10,000 Estimated residual value $2,000 Estimated useful life 5 years Depreciation method Straight-line After three years, Brigade expects that it will use the equipment for a total of six years (i.e., 3 more years). Brigade estimates no change in the residual value. What is the depreciation expense for year 4? A) $1,600. B) $1,733. C) $1,067. D) $800. The correct answer was C) $1,067. I thought for straight line depreciation, the expense for every year should be $1600 till year 5? Could someone sort my thoughts out? Thanks.
Depreciation (based on his initial postulates) = (10K - 2K)/5 = 1600 per anuum so, Year1 Depreciation = 1600 Year2 Depreciation = 1600 Year3 Depreciation = 1600 ------------------------------------ Depreciation accounted for till date = 4800 Depreciable amount left after 3 years = 10000 - 4800 = 5200 Rethinks that the equipment will work for 3 more years (change in accounting estimate… no issues… no prior year re-statements, no below the line IS item) therefore, new depreciation schedule is (5200 - 2000)/3 = 1066.667 [note Salvage didn’t change…] Year4 Depreciation = 1066.667 Year5 Depreciation = 1066.667 Year6 Depreciation = 1066.667 Total Deprecation = 1066.667*3 + 1600*3 = 8000 (that’s where we stop) So answer should be ‘C’ Let me know if this is correct? - Dinesh S
Originally, the equipment was 10,000 adn has a resdiual of 2,000. It was expected to last 5 years. Therefore each year 1,600 will be taken as depreciation (8,000/5) The rules change in year 4 (after 3 years). At this point 4,800 has already been dep. So you have 8,000-4,800=3,200 left to dep. This is taken over the remaining 3 year (new est of remaining life) for a SL of 1066. EDIT: Dinesh beat me to it.
Thanks alot guys!