Margaret Company purchased equipment on January 1, 2012, for $500,000. At the date of acquisition, the equipment had an estimated useful life of eight years with a $50,000 salvage value, and it was depreciated using the straight-line method. On January 1, 2017, based on updated information, Margaret decided that the equipment had a total estimated life of ten years and no salvage value. Depreciation expense on the equipment in 2017 should be

Question

Quizplus · Accepted Answer

- From 2012 to 2016, the equipment was depreciated over 8 years, so the annual depreciation expense was ($500,000-$50,000)/8 = $56,250.
- On January 1, 2017, Margaret revised the estimated remaining life to 10 years and eliminated the salvage value.
- To calculate the revised annual depreciation, we need to use the new remaining life and the original cost, since we don't have any new information on the current book value or accumulated depreciation as of January 1, 2017.
- The revised annual depreciation is ($500,000-0)/10 = $50,000.
- Since the change in estimate happened on January 1, 2017, we need to adjust the depreciation expense for the first five months of 2017 using the old and new methods respectively.
- For the first five months, the old depreciation rate was $56,250/12*5 = $23,437.5.
- For the same period, the revised depreciation rate is $50,000/12*5 = $20,833.33.
- The difference between the two rates is $23,437.5 -$20,833.33 = $2,604.17, which is the amount of additional depreciation expense for the first five months of 2017.
- Therefore, the total depreciation expense in 2017 should be $56,250 + $50,000 + $2,604.17 = $108,854.17, which is closest to choice D.

Margaret Company Purchased Equipment on January 1, 2012, for $500,000