Question

When originally purchased, a vehicle had an estimated useful life of 8 years. The vehicle cost $25,000 and its estimated residual value is $3,000. After 3 years of straight-line depreciation, the asset’s total estimated useful life was revised from 8 years to 5 years and there was no change in the estimated residual value. The depreciation expense in year 4 is:

Answer 1

Step-1:Calculation of book value at the end of year 3
Cost
Less accumulated depreciation or 3 years				$     25,000
				$       8,250
Book Value at the end of year 3				$     16,750
Working:
Straight line depreciation			=	(Cost - Salvage Value)/Useful Life
			=	(25000-3000)/8
			=	$       2,750
Accumulated depreciation for 3 years			=	$       2,750	*	3
			=	$       8,250
Step-2:Calculation of depreciation expense for year 4
Depreciation Expense for year 4			=	(Book Value at the beginning of year 4- Revised salvage value)/Revised remaining useful life
			=	(16750-3000)/2
			=	$       6,875