Question

The donut stop acquired equipment for $19,000. the company uses straight-line depreciation and estimates a residual value of $3,000 and a four-year service life. at the end of the second year, the company estimates that the equipment will be useful for four additional years, for a total service life of six years rather than the original four. at the same time, the company also changed the estimated residual value to $1,200 from the original estimate of $3,000. required: calculate how much the donut stop should record each year for depreciation in years 3 to 6.

Answer 1

The change in accounting estimates such as the life and residual value of a depreciable asset should be applied prospectively. During years 1 & 2, the depreciation is $4,000. However, at the end of year 2, the life of the asset was changed to 6 years and residual value is reduced to $1,200.

Thus, the depreciation starting year 3 is $2,450 computed as:

Cost of asset                               $19,000
Less: Depreciation (2 years)          8,000
Book Value                                  $11,000
Divide by remaining life                     4 years
Depreciation                                $2,750

Answer 2

The donut stop should record each year for depreciation in the year 3 to 6 is $2,450.  

Further Explanation:

Depreciation:  Depreciation is the cost allocation process in which cost is allocated over a period of life of the asset. A long-lived asset is those assets that have a period of life for more than five years. It is an operating expense. There are three methods for calculating the depreciation: straight-line method, diminishing method, and units of production method. The real price of the asset cannot be determined with the help of depreciation.

Straight-line method: In this method, the depreciation amount is computed by the difference between the cost and residual value of the assets and dividing it with the life of the assets. The depreciation amount is allocated equally over the useful life of the asset in this method.

Compute the depreciation amount for the year 3 to 6:

Refer to table: (1)

Working note 1:

Compute depreciable amount:

Depreciable amount = Carrying amount of equipment as on 2nd year + Original residual value –        

  Revised residual value

          = $8,000 + $3,000 - $2,500

          = $9,800

   

Therefore, the depreciable amount is $9,800.

Working note 2:

Compute depreciation rate:

Depreciation rate = 100% ÷ No. of estimated life

                            = 100% ÷ 4

                            = 25%

Compute the carrying amount at the end of 2 year:

Refer to table: (2)

Working note 1:

Compute depreciable amount:

Depreciable amount = Equipment cost - Residual value

                                = $19,000 - $3,000

                                = $16,000

Therefore, the depreciable amount is $16,000.

Working note 2:

Compute depreciation rate:

Depreciation rate = 100% ÷ No. of estimated life

                            = 100% ÷ 4

                            = 25%

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Answer details:

Grade: Middle School

Subject: Accounting

Chapter: Depreciation

Keywords: donut stop, acquired, equipment, $19,000, straight line depreciation, estimates, residual value, four year service life, equipment.