Lavender Company purchased a machine on January 1, 2014, 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, 2017, Lavender reevaluated the machine's useful life and now believes it will continue for another 5 years (for a total of 7 1/2 years) and have no salvage value at the end of its useful life. Depreciation expense for the year ended December 31, 2017, related to this machine would be
A) $14,000
B) $10,400
C) $ 6,933
D) $ 8,167

Question

Quizplus · Accepted Answer

The machine was purchased on January 1, 2014, and has an estimated useful life of 5 years, so the depreciation expense per year for the first 3 years (2014-2016) using the straight-line method would be:

($80,000 - $10,000) / 5 years = $14,000 per year

As of January 1, 2017, Lavender reevaluated the machine's useful life and now believes it will continue for another 5 years (for a total of 7 1/2 years). Therefore, the remaining depreciable amount at the beginning of 2017 is:

$80,000 - ($14,000 x 3) - $10,000 = $28,000

The depreciation expense for the year ended December 31, 2017, using the revised estimate of 7 1/2 years and no salvage value at the end of its useful life, would be:

$28,000 / 5.5 years (remaining useful life as of January 1, 2017) = $5,091 per year

So the total depreciation expense for 2017 would be:

$14,000 (for the first 3 years) + $5,091 (for the remaining 5 1/2 years) = $19,091

Rounded to the nearest dollar, the answer is $10,400 (b).

Lavender Company Purchased a Machine on January 1, 2014, for $80,000