Lauter Tun Corporation acquired equipment on January 1, 2017, for $300,000. The equipment had an estimated useful life of 10 years and an estimated salvage value of $25,000. On January 1, 2020, Lauter Tun Corporation revised the total useful life of the equipment to 8 years and the estimated salvage value to be $10,000. Compute depreciation expense for the year ending December 31, 2020, if Lauter Tun Corporation uses straight-line depreciation.

Question

Quizplus · Accepted Answer

To calculate the depreciation expense for the year ending December 31, 2020, after the revision of the useful life and salvage value, we first determine the book value of the equipment as of January 1, 2020. The original cost was $300,000 with a salvage value of $25,000, leading to a depreciable base of $275,000 over 10 years. For the first three years (2017, 2018, and 2019), the annual depreciation would be $275,000 / 10 = $27,500 per year. By January 1, 2020, accumulated depreciation is $27,500 * 3 = $82,500. The book value on January 1, 2020, is $300,000 - $82,500 = $217,500. With the revised life of 8 years total and 3 years already passed, there are 5 years remaining and a new salvage value of $10,000. The new depreciable base is $217,500 - $10,000 = $207,500. The revised annual depreciation is $207,500 / 5 = $41,500.

Lauter Tun Corporation Acquired Equipment on January 1, 2017, for $300,000