Pablo purchased a lathe on January 1, 2007, at a cost of $45,000. At the time of purchase, the lathe was expected to have a five-year economic life and a residual value of $3,000. Pablo uses straight-line depreciation. At the beginning of 2009, Pablo estimated the lathe to have a remaining life of four years with no residual value. For the year ended December 31, 2009, Pablo would report depreciation of:
A)$7,500.
B)$7,050.
C)$7,000.
D)$6,750.

Question

Quizplus · Accepted Answer

The lathe has a total depreciable cost of $42,000 ($45,000 - $3,000). Using straight-line depreciation, the annual depreciation expense is $8,400 ($42,000 ÷ 5).

At the beginning of 2009, with a remaining life of four years, Pablo has already taken two years of depreciation. So the remaining depreciable cost at the beginning of 2009 is $25,200 ($42,000 - 2 years x $8,400).

For the year ended December 31, 2009, Pablo would report depreciation of $7,050 ($25,200 ÷ 4 remaining years).

Pablo Purchased a Lathe on January 1, 2007, at a Cost