An asset purchased for $120 000 with a zero residual value was expected to last for six years before it needed replacing. If, at the end of the fourth year, it was decided to extend the asset's total useful life by two years (new remaining life is now eight years), the new depreciation charge using the straight-line approach would be:

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The original annual depreciation is $120,000 / 6 = $20,000. After 4 years, $80,000 ($20,000 x 4) has been depreciated, leaving a book value of $40,000. Extending the useful life by 2 years (to a total of 8 years) means there are now 4 years remaining (8 - 4 = 4). The new annual depreciation is $40,000 / 4 = $10,000.

An Asset Purchased for $120 000 with a Zero Residual