Wong purchased a computer for $15 000, net of GST. Originally it had an estimated useful life of 4 years and a residual value of $3000. The straight-line method is used. At the start of the third year of usage Wong revised the life of the computer to a total life of 6 years. The residual value had not changed. What depreciation expense should be recorded for the computer for year 3?

Question

Quizplus · Accepted Answer

Using the straight-line method, the annual depreciation expense is calculated as follows:
Depreciation expense = (Original cost – Residual value) / Useful life
Depreciation expense = ($15,000 - $3,000) / 4 = $3,000 per year
After the start of the third year, the remaining useful life of the computer is 4 years according to the original estimate, plus the additional 3 years revised, which equals 7 years of total useful life. Therefore, Wong has now used the computer for 2 out of the 7 years of total life (with 5 years remaining).
To calculate the depreciation expense for year 3, we need to determine the remaining book value as of the beginning of year 3. 
Book value = Original cost - Accumulated depreciation
Accumulated depreciation for 2 years = $3,000 x 2 = $6,000
Book value = $15,000 – $6,000 = $9,000
Then, the revised annual depreciation expense is calculated as follows:
Revised depreciation expense = (Book value – Residual value) / Remaining useful life
Revised depreciation expense = ($9,000 - $3,000) / 5 = $1,200 per year
Therefore, the depreciation expense for year 3 is $1,200. The best choice is B.

Wong Purchased a Computer for $15 000, Net of GST