Question

Davis Company purchased a new piece of equipment on July 1, 2014 at a cost of...

Davis Company purchased a new piece of equipment on July 1, 2014 at a cost of $1,800,000. The equipment has an estimated useful life of 5 years and an estimated salvage value of $150,000. The current year end is 12/31/15. Davis records depreciation to the nearest month.

If, at the end of 2016, Davis Company decides the equipment still has five more years of life beyond 12/31/16, with a salvage value of $150,000, what is straight-line depreciation for 2016? (Assume straight-line used in all years.) a. $180,000. b. $192,500. c. $217,500. d. $330,000.

the answer is B, but how did they get it.

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Answer #1
Cost of equipment   $ 1,800,000
Less: Salvage value   $   (150,000)
Depreciable value $ 1,650,000
Life of assets 5 Years
Depreciation per year ($1,650,000/5) $     330,000
Depreciation for 2014 ($330,000/12*6) $     165,000
Depreciation for 2015 $     330,000
Book value at beginning of 2016 ($1,800,000-$330,000-$165,000) $ 1,305,000
Revised life of equipment 6 Years
Depreciation for 2016 ($1,305,000-$150,000)/6) $     192,500

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