Able Towing Company purchased a tow truck for $180000 on January 1 2016. It was originally depreciated on a straight-line basis over 10 years with an assumed salvage value of $36000. On December 31 2018 before adjusting entries had been made the company decided to change the remaining estimated life to 4 years (including 2018) and the salvage value to $5000. What was the depreciation expense for 2018?

Question

Quizplus · Accepted Answer

To calculate the depreciation expense for 2018, we first need to determine the new depreciable cost of the tow truck.

The original cost was $180,000 and the original salvage value was $36,000, so the original depreciable cost was $144,000 ($180,000 - $36,000).

However, after the change in estimated life and salvage value, the new depreciable cost is $125,000 [$180,000 - $5,000 - ($36,000 - $5,000) * (3/10) / (6/12)].

To calculate the depreciation expense for 2018, we use the straight-line method:

Depreciation expense = (new depreciable cost) / (new remaining life)

Depreciation expense = $125,000 / 4 = $31,250

However, because the change in estimated life and salvage value occurred before adjusting entries had been made, we need to adjust the depreciation expense for the first three years of the asset's life to reflect the new estimates.

Using the same formula as above, we can calculate the adjusted depreciation expense for each of the first three years:

Adjusted depreciation for 2016 = $12,000 [$144,000 / 10]

Adjusted depreciation for 2017 = $24,000 [$144,000 / 10 * 2]

Adjusted depreciation for 2018 = $31,250

Total adjusted depreciation = $67,250

So the depreciation expense for 2018 is the difference between the total adjusted depreciation and the depreciation already recorded for the year:

Depreciation expense for 2018 = $67,250 - $30,700 = $36,550

Therefore, the correct answer is D) $36,550.

Able Towing Company Purchased a Tow Truck for $180000 on January