ExpertMedium1 markMultiple Choice
CPA · Question 24 · Area III: Select Transactions
On January 1, Year 1, a company purchased a machine for $100,000. It is depreciated using the straight-line method over 10 years with no salvage value. On January 1, Year 3, the company changed the estimated useful life to a total of 8 years (from acquisition date) and established a salvage value of $4,000. What is the depreciation expense for Year 3?
On January 1, Year 1, a company purchased a machine for $100,000. It is depreciated using the straight-line method over 10 years with no salvage value. On January 1, Year 3, the company changed the estimated useful life to a total of 8 years (from acquisition date) and established a salvage value of $4,000. What is the depreciation expense for Year 3?
Answer options:
A.
$12,000
B.
$12,667
C.
$16,000
D.
$9,500
How to approach this question
Change in Estimate = Prospective. <br/>1. Calculate Book Value at date of change. <br/>2. Subtract new salvage value. <br/>3. Divide by *remaining* useful life.
Full Answer
B.$12,667✓ Correct
B
1. Calculate BV at Jan 1, Year 3: <br/> Original Depr = $100,000 / 10 = $10,000/year. <br/> Accum Depr (2 years) = $20,000. <br/> BV = $80,000.<br/>2. Determine new parameters:<br/> New Total Life = 8 years. Years passed = 2. Remaining Life = 6 years.<br/> New Salvage = $4,000.<br/>3. Calculate New Depreciation:<br/> ($80,000 - $4,000) / 6 years = $12,667.
Common mistakes
Using the original cost instead of BV. Using the new total life (8) instead of remaining life (6).
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