Renewable Energies, Incorporated (REI)paid $100,000 to purchase a windmill. The windmill was expected to have a 10-year useful life and a $30,000 salvage value. At the beginning of the fifth year of operation, REI changed the estimated useful life from 10 years to 14 years. Assuming the Company uses the straight-line method, the amount of depreciation expense on the Year 5 income statement would be

Question

Quizplus · Accepted Answer

Using the straight-line method, the annual depreciation expense would be calculated as follows:
Original estimated useful life: $100,000 - $30,000 / 10 years = $7,000 per year
Revised estimated useful life: $100,000 - $30,000 / 14 years = $5,000 per year

Since the change in estimated useful life occurred in the fifth year of operation, only five years' worth of depreciation had been recorded using the original estimated useful life. Therefore, the depreciation expense for Year 5 would be the difference between the original depreciation expense of $7,000 and the revised depreciation expense of $5,000, or $2,000.

Thus, the depreciation expense on the Year 5 income statement would be $7,000 - $2,000 = $5,000.

Renewable Energies, Incorporated (REI)paid $100,000 to Purchase a Windmill