Question

ABC purchased equipment on January 1, 2018, for $650,000. In 2018 and 2019, ABC depreciated the asset on a straight-line basis with an estimated useful life of eight years and a $10,000 residual value. In the beginning of 2020, due to changes in technology, ABC revised the remaining useful life to four years with no residual value. What depreciation would ABC record for the year 2020 on this equipment? A) $108,333 B) $106,667 C) $122,500 D) $134,000

Please explain and/or show work

Answer 1

The correct choice is- C)$122,500.

Depreciation estimate=(Cost-Salvage Value)/Useful Life
Depreciation estimate=($650,000-$10,000)/8
Depreciation estimate=$80,000 per year

the asset is depreciated at this rate and after 2 years (2018 and 2019) the accumulated depreciation on the asset is 80,000 x 2 =$ 160,000.

Now -

Net Book Value=Cost-Accumulated depreciation
Net Book Value=$650,000-$160,000
Net Book Value=$490,000

This net book value of $490,000 needs to be depreciated over the remaining useful life of the asset that is four years, without any salvage value. The revised depreciation estimate is calculated as follows:

Depreciation estimate for 2020=(Cost-Salvage Value)/Useful Life
Depreciation estimate=($490,000-0)/4
Depreciation estimate=$122,500 per year.

So depreciation for 2020 will be $122,500.

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