Nanki Corporation purchased equipment on January 1, 2011, for $650,000. In 2011 and 2012, Nanki depreciated the asset on a straight-line basis with an estimated useful life of eight years and a $10,000 residual value. In 2013, due to changes in technology, Nanki revised the useful life to a total of six years with no residual value. What depreciation would Nanki record for the year 2013 on this equipment?

Question

Quizplus · Accepted Answer

For the first two years of its useful life, depreciation will have been computed based on the following information:
Cost: $650,000
Useful life: 8 years
Residual value: $10,000

Therefore, depreciation for the first year was: 
($650,000 - $10,000) / 8 = $80,000

And for the second year, it was: 
($650,000 - $10,000 - $80,000) / 8 = $77,500

Therefore, the carrying value of the equipment at the beginning of 2013 would be: 
$650,000 - $10,000 - $80,000 - $77,500 = $482,500

To compute depreciation for 2013, we need to calculate the straight-line depreciation based on the revised useful life of 6 years and no residual value. The annual depreciation would therefore be: 
($650,000 - $0) / 6 = $108,333

So Nanki would record depreciation of $108,333 for 2013 on this equipment.

Nanki Corporation Purchased Equipment on January 1, 2011, for $650,000