In: Accounting
On 1/1/09, AW Consulting Inc. bought a truck for $60,000. The estimated residual value of the truck was $10,000 and the estimated life was ten years. AW Consulting uses the straight line depreciation method when depreciating its vehicles. During January 2012, after the 2011 financial statements were already published and after careful analysis and consideration, AW realized that they should have depreciated the truck over a period of 14 years. Assuming AW accounts for the January event correctly, how much should AW have in depreciation expense for this truck for the period of
Calculation of Straight line depreciation expense as per original estimate:
Original Cost of Truck = $60000
Residual Value of truck = $10000
Estimated useful life = 10 years
Straight line Depreciation expense = (Cost of Truck - Residual Value of truck) / Estimated useful life
= ( $60000 - $10000) / 10 years = $50000/10 years = $5000
Accumulated Depreciation up to year 2011 = $5000*3 = $15000
Book Value of Truck as on 01/01/2012 = Original Cost of Truck - Accumulated Depreciation up to year 2011
= $60000 - $15000 = $45000
Calculation of Straight line depreciation expense as per revised estimate:
Total revised useful life = 14 years
Remaining useful life of Truck = 14 Years - 3 year (already used) = 11 years
Straight line Depreciation expense for year 2012 =
(Book Value of Truck - Residual Value of truck) / Remaining useful life of Truck
=($45000 - $10000) / 11 years = $35000 / 11 years = $ 3181.82 i.e. $3182 (rounded off)
Note : Question is silent about Salvage value after analysis hence we assume there is no change in amount of salvage value and consider salvage value is $10000.