Farmer Company purchased machine on January 1, Year 1 for $141,000. The machine is estimated to have a 5-year life and a salvage value of $22,000. The company uses the straight-line method.At the beginning of Year 4, Farmer revised the expected life to eight years. What is the annual amount of depreciation expense for each of the remaining years in the machine's life?
A)$9,520
B)$13,920
C)$8,700
D)$5,950

Question

Quizplus · Accepted Answer

Using the straight-line method, the annual depreciation expense can be calculated as follows:

Annual Depreciation Expense = (Cost - Salvage Value) / Estimated Life

For the first three years (Year 1, Year 2, and Year 3), the annual depreciation expense would be:

Annual Depreciation Expense = ($141,000 - $22,000) / 5 years = $23,800

At the beginning of Year 4, the company revised the estimated life to eight years. Therefore, the remaining useful life of the machine would be:

Remaining useful life = 8 years - 3 years (already depreciated) = 5 years

To calculate the annual depreciation expense for each of the remaining years, we can use the same formula as before, but with the remaining depreciable cost and remaining useful life:

Annual Depreciation Expense = (Remaining Cost - Salvage Value) / Remaining Life

Year 4: 
Remaining Cost = $141,000 - ($23,800 x 3) = $69,800
Annual Depreciation Expense = ($69,800 - $22,000) / 5 years = $9,560

Year 5: 
Remaining Cost = $69,800 - $9,560 = $60,240
Annual Depreciation Expense = ($60,240 - $22,000) / 4 years = $9,560

Year 6: 
Remaining Cost = $60,240 - $9,560 = $50,680
Annual Depreciation Expense = ($50,680 - $22,000) / 3 years = $9,560

Year 7: 
Remaining Cost = $50,680 - $9,560 = $41,120
Annual Depreciation Expense = ($41,120 - $22,000) / 2 years = $9,560

Year 8: 
Remaining Cost = $41,120 - $9,560 = $31,560
Annual Depreciation Expense = ($31,560 - $22,000) / 1 year = $9,560

Therefore, the annual amount of depreciation expense for each of the remaining years in the machine's life is $9,560. The closest answer choice is A) $9,520.

Farmer Company Purchased Machine on January 1, Year 1 for $141,000