Iverycoast Inc. purchased a van on January 1, 2015, for $800,000. Estimated life of the van was 5 years, and its estimated residual value was $90,000. Iverycoast uses the straight-line method of depreciation. At the beginning of 2017, the company revised the total estimated life of the asset from 5 years to 6 years. The estimated residual value remained the same as estimated earlier. Calculate the depreciation expense for the year 2017.

Question

Quizplus · Accepted Answer

Straight-line depreciation method formula is as follows:
Annual depreciation = (Cost of asset - Residual value) / Estimated life of the asset

Initially, the annual depreciation expense was calculated as:
(800,000 – 90,000)/5 = $142,000

Then, at the beginning of 2017, the estimated life was revised from 5 years to 6 years. Therefore, the remaining life of the van at the beginning of 2017 was 4 years (total estimated life of 5 years – already depreciated for 2 years).

Revised annual depreciation expense:
(800,000 – 90,000)/6 = $135,000

Depreciation expense for the year 2017 would be for a period of one year, and therefore, using the straight-line method, we can calculate it as:
Depreciation expense for the year 2017 = (Cost of asset - Accumulated depreciation at the beginning of 2017) * (1/remaining life)
= (800,000 - (142,000 * 2)) * (1/4)
= $106,500

Therefore, the correct answer is C) $106,500.