Myster Co purchased equipment for $25 000. Originally it had an estimated useful life of 4 years and a residual value of $5000. At the beginning of the 4th year of the equipment's life the estimated useful life was extended by a further three years and the residual value was reduced to zero. Myster Co uses the straight-line method to depreciate its equipment. At the end of year 4, how much depreciation should be recorded for the computer?

Question

Quizplus · Accepted Answer

Using the straight-line method, the annual depreciation expense can be calculated as follows:

Depreciation expense = (Cost - Residual Value) / Useful Life

For the first three years, the depreciation expense is:

Depreciation expense = ($25,000 - $5,000) / 4 = $5,000 per year

At the beginning of year 4, the useful life was extended by a further three years, making the new total useful life 7 years. The remaining depreciable base at the beginning of year 4 can be calculated as:

Remaining depreciable base = Cost - Accumulated depreciation 
= $25,000 - $5,000 x 3 
= $10,000

The annual depreciation expense for the remaining 4 years (years 4 to 7) is:

Annual depreciation expense = Remaining depreciable base / Remaining useful life 
= $10,000 / 4 = $2,500

Therefore, the total depreciation expense for year 4 is the sum of the depreciation expense for the first three years and the depreciation expense for year 4 calculated above:

Total depreciation expense for year 4 = $5,000 + $2,500 = $7,500

In conclusion, the correct choice is B.

Myster Co Purchased Equipment for $25 000