Lavender Company purchased a machine on January 1, 2016, for $80,000. The machine has an estimated useful life of 5 years with a salvage value of $10,000. It is being depreciated using the straight-line method. On January 1, 2018, Lavender reevaluated the machine's useful life and now believes it will continue for another 5 years for a total of 7 years) and have no salvage value at the end of its useful life. What is the amount of depreciation expense related to this machine for the year ended December 31, 2018?
A) $14,000
B) $10,400
C) $8,400
D) $7,430

Question

Quizplus · Accepted Answer

Initially, the annual depreciation expense from 2016 to 2020 (5 years) using the straight-line method is calculated as: (Cost - Salvage Value) / Useful Life = ($80,000 - $10,000) / 5 = $14,000 per year. By the end of 2017 (2 years), the accumulated depreciation is $28,000 ($14,000 * 2). The book value at the beginning of 2018 is $80,000 - $28,000 = $52,000. With the revised estimate in 2018, the remaining useful life is 5 years, and the revised salvage value is $0. The new annual depreciation expense from 2018 onwards is: (Book Value at the beginning of 2018 - New Salvage Value) / New Remaining Useful Life = ($52,000 - $0) / 5 = $10,400.

Lavender Company Purchased a Machine on January 1, 2016, for $80,000