Question

On January 2, 2017, the Matthews Band acquires sound equipment for concert performances at a cost of $65,800. The band estimates it will use this equipment for four years. It estimates that after four years it can sell the equipment for $2,000. Matthews Band uses straight-line depreciation but realizes at the start of the second year that due to concert bookings beyond expectations, this equipment will last only a total of three years. The salvage value remains unchanged.
Compute the revised depreciation for both the second and third years.

Answer 1

Answer:

The revised depreciation expense for the second year = Depreciation expense for the third years = $23,925

Explanation:

The Matthews Bandy uses straight-line depreciation method, Depreciation Expense per year is calculated by following formula:

Depreciation Expense = (Cost of equipment − Salvage Value )/Useful Life

For the first year,

Depreciation Expense = ($65,800 - $2,000)/4 = $15,950

At the end of the first year,

Book vale of the equipment = $65,800 - $15,950 = $49,850

At the start of the second year, this equipment will last only a total of three years ( remaining useful life 2 year) with a residual value of $2,000.

Depreciation Expense for second year = ($49,850 - $2,000)/2 = $23,925

Depreciation Expense for third year = $23,925