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 4 years. The estimated residual value remained the same as estimated earlier. Calculate the depreciation expense for the year 2017.

Question

Quizplus · Accepted Answer

Under the straight-line method of depreciation, the annual depreciation can be calculated as follows:

Annual Depreciation = (Cost - Residual value) / Estimated life

Original Annual Depreciation = ($800,000 - $90,000) / 5 = $142,000

After the revision of the estimated life, the remaining life of the van in 2017 will be 3 years (from 2017 to 2019). Therefore, the revised annual depreciation can be calculated as follows:

Revised Annual Depreciation = ($800,000 - $90,000) / 4 = $177,500

To calculate the depreciation expense for 2017, we need to pro-rate the revised annual depreciation for the remaining 3 years:

Depreciation expense for 2017 = Revised Annual Depreciation * (remaining life / total life)

= $177,500 * (3 / 4)

= $133,125

Therefore, the correct option is B, i.e., $213,000.