Wu's Copy Shop bought equipment for $16,000 on January 1, 2017. Wu estimated the useful life to be 4 years with no residual value, and the straight-line method of depreciation will be used. On December 31, 2018, prior to recording depreciation for that year, Wu decides that the business will use the equipment for a total of 5 years. What is the depreciation expense for 2018?

Question

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The equipment was purchased on January 1, 2017. Its estimated useful life is 4 years, which means that it would have been depreciated fully by December 31, 2020. If the equipment is now going to be used for an extra year, the company must adjust the depreciation expense for 2018 to reflect its increased estimated useful life.

To calculate the depreciation expense for 2018, we need to know the depreciable cost of the equipment, which is its original cost ($16,000) minus its residual value (which is assumed to be zero). The depreciable cost is therefore $16,000.

Under the straight-line method, the annual depreciation expense is calculated by dividing the depreciable cost by the estimated useful life. For the equipment purchased on January 1, 2017, the annual depreciation expense would normally have been $4,000 ($16,000 divided by 4 years). However, since the equipment is now going to be used for 5 years instead of 4, the annual depreciation expense needs to be adjusted to reflect this.

To calculate the depreciation expense for 2018, we need to know the portion of the equipment's depreciable cost that has not yet been depreciated. At the end of 2017, one year of depreciation expense would have been recorded, leaving a remaining depreciable cost of $12,000 ($16,000 minus $4,000). The depreciation expense for 2018 would therefore be $2,400 ($12,000 divided by 5 years).

Therefore, the correct answer is C) $3,000.

Wu's Copy Shop Bought Equipment for $16,000 on January 1