Question

Machinery acquired new on January 1 at a cost of $70,000 was estimated to have a useful life of 9 years and a residual salvage value of $7,000. Straight-line depreciation was used. On January 1, following six full years of use of the machinery, management decided that the estimate of useful life had been too long and that the machinery would have to be retired after two years, that is, at the end of the eighth year of service. Under this revised estimate, the depreciation expense for the seventh year of use would be:

$10,500.

$21,000.

$10,500.

$7,000.

Answer 1

Answer:

Cost of Machinery = $70,000
Useful Life = 9 years
Residual Value = $7,000

Depreciation per Year = (Cost – Residual Value) / Useful Life
Depreciation per Year = (70,000 – 7,000) / 9
Depreciation per Year = $7,000

Depreciation for 6 years = $7,000 * 6
Depreciation for 6 years = $42,000

Book Value on the date of Change = $70,000 - $42,000
Book Value on the date of Change = $28,000

Revised Depreciation = (Book Value on the date of Change – Residual Value) / Revised Life
Revised Depreciation = (28,000 – 7,000) / 2
Revised Depreciation = 21,000 / 2
Revised Depreciation = $10,500

Depreciation for Seventh Year is $10,500.