Able Towing Company purchased a tow truck for $150,000 on January 1, 2013. It was originally depreciated on a straight-line basis over 10 years with an assumed residual value of $30,000. On December 31, 2015, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2015) and the residual value to $5,000. What was the depreciation expense for 2015?

Question

Quizplus · Accepted Answer

To calculate the depreciation expense for 2015, we need to determine the carrying value of the tow truck as of January 1, 2015 (the beginning of the year), and then subtract the revised estimated residual value from this amount. We can then divide the result by the remaining estimated life of the asset (4 years) to find the annual depreciation expense.

Carrying value as of January 1, 2015 can be calculated using straight-line depreciation method:
Depreciation per year = (Purchase price - Residual value) / Useful life
          = ($150,000 - $30,000) / 10 years
          = $12,000 per year
So, the carrying value on January 1, 2015 would have been $108,000 ($150,000 - $12,000 x 2 years)

Now, the company changes the residual value to $5,000 and the useful life to 4 years from 2015. Let's recalculate the depreciation rate for remaining useful life:

Depreciation per year = (Carrying value - New residual value) / Remaining useful life
                            = ($108,000 - $5,000) / 4
                            = $25,750

Since the change was made before adjusting entries had been made for 2015, we will use the full year's depreciation expense of $25,750.

Able Towing Company Purchased a Tow Truck for $150,000 on January