Able Towing Company purchased a tow truck for $180,000 on January 1, 2017. It was originally depreciated on a straight-line basis over 10 years with an assumed salvage value of $36,000. On December 31, 2019, before adjusting entries had been made, the company decided to change the remaining estimated life to 4 years (including 2019) and the salvage value to $5,000. What was the depreciation expense for 2019?

Question

Quizplus · Accepted Answer

Under the straight-line method, the annual depreciation expense is calculated as follows:
Annual depreciation expense = (Cost - Salvage value) / Useful life

Using the original estimates, depreciation expense for 2019 would have been:
($180,000 - $36,000) / 10 = $14,400

After the adjustment, the remaining useful life is 4 years (including 2019) and the salvage value is $5,000. The revised annual depreciation expense is:
($180,000 - $5,000) / 4 = $43,750

To calculate the depreciation expense for 2019, we need to prorate the revised annual expense using the time the asset was in use during the year. The asset was in use for the full year, so the depreciation expense for 2019 is:
($43,750 / 12) * 12 = $43,750

However, since the adjusting entries had not been made, we need to subtract the original depreciation expense for 2019 that was recorded before the adjustment:
$43,750 - $14,400 = $29,350

Therefore, the depreciation expense for 2019 is $29,350, which is closest to option D ($36,550).

Able Towing Company Purchased a Tow Truck for $180,000 on January