Question

Fordon Corporation purchased a piece of equipment for $50,000. It estimated a 8-year life and $2,000 salvage value. At the end of year 4 (before the depreciation adjustment), it estimated the new total life to be 10 years and the new salvage value to be $4,000. Compute the revised depreciation. Company uses straight-line depreciation method. (Round answer to 0 decimal places, e.g. 125.) Revised depreciation

Answer 1

Answer:

Revised Depreciation charge per year is $2,200

Explanation:

Revised Depreciation can be calculated in 3 steps:

Step 1: Annual Depreciation charge of Equipment using initial estimate

Depreciation charge = (Cost of Asset – Salvage Value) / Useful life

Depreciation charge = ($50,000 - $2,000) / 8 years = $6,000 per year

Step 2: Calculate Net Book Value of Equipment at the end of year 4

Cost of Asset:                                                                            $50,000

Less: Accumulated Depreciation of 4 Years ($6,000 x 4):    ($24,000)

Net Book Value:                                                                    $26,000

Step 3: Calculate Revised Depreciation charge using the revised useful life

Revised Depreciation charge = (Net Book Value of Asset at the end of Year 4  – New Salvage Value) / Revised Useful life

Revised Depreciation charge = ($26,000 - $4,000) / 10 Years = $2,200 per year