Proctor Paper Products purchased a machine on January 1, 2011, at a cost of $380,000 with an estimated residual value of $30,000 at the end of its estimated useful life of 8 years.On January 1, 2013, Proctor Paper estimates that the machine only has a remaining life of 5 years and a residual value of $20,000.Proctor Paper uses straight-line amortization.Depreciation expense for 2013 would be:
A)$48,500
B)$54,500
C)$57,000
D)$72,000

Question

Quizplus · Accepted Answer

To calculate depreciation expense, we need to first determine the depreciable cost of the machine, which is the cost minus the residual value:

Depreciable cost = cost - residual value 
Depreciable cost = $380,000 - $30,000 
Depreciable cost = $350,000

Next, we need to determine the annual depreciation expense:

Annual depreciation expense = depreciable cost / useful life 
Annual depreciation expense = $350,000 / 8 
Annual depreciation expense = $43,750

Since the machine has already been in service for 2 years, the accumulated depreciation for the machine as of January 1, 2013 would be:

Accumulated depreciation = annual depreciation expense x number of years in service 
Accumulated depreciation = $43,750 x 2 
Accumulated depreciation = $87,500

The book value of the machine as of January 1, 2013 would be:

Book value = cost - accumulated depreciation 
Book value = $380,000 - $87,500 
Book value = $292,500

Proctor Paper estimates that the machine has a remaining useful life of 5 years, so the total depreciation expense for the remaining life of the machine would be:

Total depreciation expense = annual depreciation expense x remaining useful life 
Total depreciation expense = $43,750 x 5 
Total depreciation expense = $218,750

However, Proctor Paper also estimates that the residual value of the machine at the end of its useful life is $20,000, not $30,000 as originally estimated. This means that as of January 1, 2013, the remaining depreciable cost of the machine is:

Remaining depreciable cost = depreciable cost - accumulated depreciation - new residual value 
Remaining depreciable cost = $350,000 - $87,500 - $20,000 
Remaining depreciable cost = $242,500

So, we need to adjust the annual depreciation expense to reflect the updated residual value:

New annual depreciation expense = remaining depreciable cost / remaining useful life 
New annual depreciation expense = $242,500 / 5 
New annual depreciation expense = $48,500

Therefore, the depreciation expense for 2013 would be:

Depreciation expense = new annual depreciation expense x number of years in service for the year 
Depreciation expense = $48,500 x 1 
Depreciation expense = $48,500

Therefore, the best choice is B) $54,500.

Proctor Paper Products Purchased a Machine on January 1, 2011