Question

On January 1, 2017, Pollyford Corporation acquired machinery at a cost of $500,000. Pollyford adopted the straight-line balance method of depreciation for this machinery and had been recording depreciation over an estimated useful life of ten years, with no residual value. At the beginning of 2020, a decision was made to change the residual to $100,000. The remaining life of the machine is now estimated to be 10 more years. The depreciation expense to be recorded for the machinery in 2020 is (round to the nearest dollar)

a.   $6,250

b.   $12,500

c.   $25,000

d.   $75,000

Answer 1

Depreciation expense for 3 years ( 2017 to 2019) = Annual depreciation x 3

= 50,000 x 3

= $150,000

Book value at the beginning of year 2020 = Cost of machinery- Depreciation expense for 3 years

= 500,000-150,000

= $350,000

In the beginning of 2020:

Residual value = $100,000

Revised useful life = 10 more years

Depreciation expense for 2020 = (Book value at the beginning of year 2020- Residual value)/ Revised useful life

= (350,000-100,000)/10

= 250,000/10

= $25,000

Correct option is c.

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