Farmer Company purchased equipment on January 1, Year 1 for $82,000. The equipment is estimated to have a 5-year life and a salvage value of $4,000. The company uses the straight-line depreciation method. If the original expected life remained the same (i.e., 5-years), but at the beginning of Year 4, the salvage value was revised to $8,000, the annual depreciation expense for each of the remaining years would be:

Question

Quizplus · Accepted Answer

Annual depreciation expense = (Cost of equipment - salvage value) / useful life

Using the original information:
Annual depreciation expense = ($82,000 - $4,000) / 5 years = $15,600

If the salvage value is revised to $8,000 at the beginning of Year 4, the remaining useful life of the equipment is 2 years (5 years original life - 3 years already passed).
New book value after 3 years = $82,000 - $15,600 x 3 = $35,200
New annual depreciation expense = ($35,200 - $8,000) / 2 years = $13,600

Therefore, the annual depreciation expense for each of the remaining years would be $13,600. Choice (C) is the correct answer.

Farmer Company Purchased Equipment on January 1, Year 1 for $82,000