Question

A company used straight-line depreciation for an item of equipment that cost $16,250, had a salvage value of $3,800 and a six-year useful life. After depreciating the asset for three complete years, the salvage value was reduced to $1,625 but its total useful life remained the same. Determine the amount of depreciation to be charged against the equipment during each of the remaining years of its useful life:

Multiple Choice

$3420

$1245

$2800

$6142

$3800

$

Answer 1

Answer : $2,800

Explanation:

Accounting for change in the estimates is not done by adjusting the prior period depreciation amount rather it is done by changing the subsequent calculation .

Initially, the depreciation was :

Depreciation cost =( 16250 - 3800 ) / 6

= $ 2075

After 3 years the estimated salvage value is changed to    $ 1,625.

The further depreciation cost will be changed by taking the book value as at the end of year 3.

Book value at the end of year 3 = [16,250 - (2075*3)]

= $ 10,025

Now new depreciation cost will be :

(10,025 - 1625)/3 = $ 2800

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