Question

Question 1 Part A and B

A. Nanki Corporation purchased equipment on January 1, 2016, for $630,000. In 2016 and 2017, Nanki depreciated the asset on a straight-line basis with an estimated useful life of eight years and a $6,000 residual value. In 2018, due to changes in technology, Nanki revised the useful life to a total of 6 years with no residual value. What depreciation would Nanki record for the year 2018 on this equipment? (Round your answer to the nearest dollar amount.)

Multiple Choice

• $104,000.

• $103,183.

• $118,500.

• None of these answer choices are correct.

B. Broadway Ltd. purchased equipment on January 1, 2016, for $420,000, estimating a 7-year useful life and no residual value. In 2016 and 2017, Broadway depreciated the asset using the straight-line method. In 2018, Broadway changed to sum-of-years'-digits depreciation for this equipment. What depreciation would Broadway record for the year 2018 on this equipment? (Do not round your depreciation rate.)

Multiple Choice

• $50,000.

• $60,000.

• $120,000.

• $100,000.

Answer 1

Answer to A. Option d. $ 118,500

A. Calculation of Depreciation expense for year 2018:

Book value of equipment at Beginning of 3rd year = Cost - Depreciation for 2years (Accumulated Depreciation)

= $ 630,000 - $ 156,000

= $ 474,000

Revised salvage value is zero & useful life total 6 years from beginning. Thus, Revised useful life of equipement is 6 years & used life is 2 year thus remaining life of asset is 4 years

Computation of depreciation expense for 2018 is as follows:

Depreciation expense = (Book value of equipment at beginning of 3rd year - Revised residual value) / ( Revised useful life - used life )

= ( $ 474,000 - $ 0 ) / ( 6 - 2 )

= $ 474,000 / 4

= $ 118,500

Thus, Depreciation expense for year 2018 is $ 118,500

Working note:

Calculation of Depreciation for first 2 years is as follows:

Useful life & salvage value revised after 2 years

Thus, Depreciation expense of equipement for first 2 years is as follows:

Depreciation expense per year = ( Cost - residual value ) / Useful life

= ( $ 630,000 - $ 6,000 ) / 8

= $ 78,000

Thus, Depreciation for first 2 years = $ 78000 * 2

= $ 156,000

Change in estimated useful life & residual value are change in accounting estimate which has effect propspectively.

Answer to B. Option d. $ 100,000

B. Calculation of Depreciation expense for year 2018:

Total useful life was 7 years out of which 2 years equipment is depreciated using straight line method.

Thus, Remaining 5 years of life is to be depreciable under sum-of-years'-digits method

Terms to know,

Sum of the years:

Useful life is 5 years

Sum of the years: 1 + 2 + 3 + 4 +5 = 15

Useful life is 5 years

In 1st year (2018) remaining useful life of equipement is 5 years

In 2nd year (2019) remaining useful life of equipment is 4 years

In 3rd year (2020) remaining useful life of equipment is 3 years

In 4th year (2021)remaining useful life of equipment is 2 years

In 5th year (2022) remaining useful life of equipement is 1 year

Book value of equipment at Beginning of 3rd year = Cost - Depreciation for 2years (Accumulated Depreciation)

= $ 420,000 - $ 120,000

= $ 300,000

Thus, $ 300,000 is depreciable amount. There is no salvage value

1st year(2018) Depreciation = ( Remaining useful life of equipement / Sum of the years ) * Depreciable Amount

= ( 5 / 15 ) * $ 300,000

= $ 100,000

Thus, Depreciation expense for year 2018 is $ 100,000

Working note:

Calculation of Depreciation for first 2 years is as follows:

Useful life & salvage value revised after 2 years

Thus, Depreciation expense of equipement for first 2 years is as follows:

Depreciation expense per year = ( Cost - residual value ) / Useful life

= ( $ 420,000 - $ 0 ) / 7

= $ 60,000

Thus, Depreciation for first 2 years = $ 60,000 * 2

= $ 120,000

Change in estimated useful life & residual value are change in accounting estimate which has effect propspectively.