Company A purchased a lathe on January 1, 2019, at a cost of $45,000. At the...

Company A purchased a lathe on January 1, 2019, at a cost of $45,000. At the time of purchase, the lathe was expected to have a five-year economic life and a residual value of $3,000. Company A uses straight-line depreciation. At the beginning of 2021, Company A estimated the lathe to have a remaining life of four years with no residual value. For the year ended December 31, 2021, Company A would report depreciation expense of: A. $6750 B. $7050 C. $7000 D. $7500 I'm looking for the answer and an explanation please. TYIA

Expert Solution

Cost of Lathe as on 1/1/19 = 45000

Estimated life = 5Years

Residual value at the end of 5 Year = 3000

:- Company Uses straight line depreciation = Formula to Calculate Depreciation = Cost of product - Residual Value / estimated life.

So. Amount of Depreciation for Every year = 45000-3000/5 = 8400.

Now. for the continuous Two years depreciation for $8400 will be charged for year2019 & year 2020.

So, the Cost of Lathe as on 1/1/19 = 45000

Depreciation as on 31/12/19 = (8400)

Book Value as on 1/1/2020 = 36600 (*45000-8400)

Deprciation as on 31/12/2020 = (8400)

Book Value as on 1/1/2021 = 28200 (*36600-8400)

And then company again estimated life of Lathe in beginning of 2021 to be 4 years with No RESIDUAL VALUE.

HENCE, we'll be calculating the amount of depreciation again for the rest of 4 years taking into consideration of 0 residual value.

Therefore, Amount of Depreciation from 2021 for every year = 28200 - 0/4= $ 7050.

ekkarill92 answered 2 years ago

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