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. At the beginning of Year 4, Farmer revised the expected life to eight years. The annual amount of depreciation expense for each of the remaining years would be:

Question

Quizplus · Accepted Answer

At the beginning of Year 4, the book value of the equipment is calculated by subtracting the accumulated depreciation for the first 3 years from the initial cost. Using the straight-line method, annual depreciation for the first 3 years is ($82,000 - $4,000) / 5 = $15,600 per year. Accumulated depreciation by the start of Year 4 is $15,600 * 3 = $46,800. The book value at the beginning of Year 4 is $82,000 - $46,800 = $35,200. With the revised life expectancy of 8 years total and 3 years already passed, there are 5 years remaining. The revised annual depreciation is ($35,200 - $4,000) / 5 = $6,240.

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