Question

When originally purchased, a vehicle had an estimated useful life of 8 years. the vehicle cost $23,000 and its estimated salvage value is $1,500. after 4 years of straight-line depreciation, the asset's total estimated useful life was revised from 8 years to 6 years and there was no change in the estimated salvage value. the depreciation expense in year 5 equals:?

Answer 1

We first calculate the annual straight-line depreciation for the starting 8-year useful lifespan. This is given by the value minus the salvage value (23,000 - 1,500) divided by the 8 year lifespan, resulting in annual depreciation of 2,687.50 dollars. After four years at this rate, the vehicle has depreciated in value by 2,687.50 * 4 dollars (10,750) and has a present value of 12,250 dollars. The useable life is then reduced by 2 years so we must recalculate the straight-line depreciation. This is given by present value minus salvage cost (12,250 - 1,500) divided by the remaining 2 years of usable life. This results in a depreciation expense in both years 5 and 6 of $5,375.