B Company switched from the sum-of-the-years-digits depreciation method to straight-line depreciation in 2016.The change affects machinery purchased at the beginning of 2014 at a cost of $72,000.The machinery has an estimated life of five years and an estimated residual value of $3,600.What is B's 2016 depreciation expense?

Question

Quizplus · Accepted Answer

The straight-line depreciation method calculates annual depreciation as (Cost - Residual Value) / Useful Life. For the machinery: ($72,000 - $3,600) / 5 = $13,680 per year. However, since the machinery was purchased in 2014 and the switch happened in 2016, the depreciation for 2016 should be based on the remaining book value and remaining useful life. By 2016, two years of depreciation have already been accounted for, so the remaining book value is $72,000 - 2 * $13,680 = $44,640. The remaining useful life is 3 years, so the 2016 depreciation expense is $44,640 / 3 = $14,880. However, since the question asks for the depreciation expense under the straight-line method from the beginning, the correct answer is $13,680.

B Company Switched from the Sum-Of-The-Years-Digits Depreciation Method to Straight-Line