Question

Apex Fitness Club uses straight-line depreciation for a machine
costing $26,700, with an estimated four-year life and a $2,850
salvage value. At the beginning of the third year, Apex determines
that the machine has three more years of remaining useful life,
after which it will have an estimated $2,400 salvage value.

**Required:**

**1.** Compute the machine’s book value at the end of
its second year.

**2.** Compute the amount of depreciation for each of
the final three years given the revised estimates

1.

Cost

Accumulated depreciation 2 years

Book value at point of revision

2.

Book value at point of revision

Revised salvage value

Remaining depreciable cost

Years of life remaining

Revised annual depreciation year (3-5)

Answer #1

Depreciation under Straight line method = (Cost - Salvage value) / Estimated useful life

= ($26,700 - $2,850) / 4

= $5,962.5

1. Cost = $26,700

Accumulated depreciation 2 years = $5,962.5 * 2 = $11,925

Book value at point of revision = Cost - Accumulated depreciation

= $26,700 - $11,925

= $14,775

2. Book value at point of revision = $14,775

Revised salvage value = $2,400

Remaining depreciable cost = Book value at point of revision - Revised salvage value

= $14,775 - $2,400

= $12,375

Years of life remaining = 3

Revised annual depreciation year (3-5) = Remaining depreciable cost / Years of life remaining

= $12,375 / 3

= $4,125

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