Question

Delta Machine Company purchased a computerized assembly machine for $135,000 on January 1, 2018. Delta Machine Company estimated that the machine would have a life of four years and a $25,000 salvage value. Delta Machine Company uses the straight-line method to compute depreciation expense. At the beginning of year 3 (2020) Delta discovered that the machine was quickly becoming obsolete and would have little value at the end of its useful life. Consequently, Delta Machine Company revised the estimated salvage to only $5,000. It did not change the estimated useful life of the machine. Compute the depreciation expense for each of the four years.

Answer 1

• All working forms part of the solution and is explained accordingly.
• When there is a change in estimate of amount of Salvage Value, the new salvage value is deducted from the book value existing on that day/year. That depreciable base is then divided by remaining years of Useful Life.
• Working for Depreciation

-----Year 1 & 2

A	Original cost	135000
B	Salvage Value original	25000
C	Estimated life	4
D=(A-B)/C	Straight Line annual depreciation	27500

-----Year 3 & 4

A	Original cost of assets	135000
B	Depreciation year 1	27500
C	Depreciation year 2	27500
D=A-B-C	Opening book value at the beginning of Year 3 (2020)	80000
F	New estimated salvage Value	5000
G=4-2	Remaining Life	2
H=(D-F)/G	New Straight Line Depreciation	37500

• Requirement of question

Year	Opening book value (A)	Depreciation (B) [as calculated above]	Closing book value (A-B)
1	135000	27500	107500
2	107500	27500	80000
3	80000	37500	42500
4	42500	37500	5000