Question

The Donut Stop acquired equipment for $23,000. The company uses straight-line depreciation and estimates a residual value of $3,400 and a four-year service life. At the end of the second year, the company estimates that the equipment will be useful for four additional years, for a total service life of six years rather than the original four. At the same time, the company also changed the estimated residual value to $2,000 from the original estimate of $3,400.

Required:

Calculate how much The Donut Stop should record each year for depreciation in years 3 to 6.

Cost of the equipment:

Less: accumulated depreciation (year 1 & 2):

Book value, end of year 2:

Less: new residual value:

New depreciable cost:

Remaining service life:

Annual depreciation in years 3 to 6

Answer 1

Correct Answer:

year	opening book value	Depreciation Expense	Ending book value
1	$ 23,000.00	$   4,900.00	$ 18,100.00
2	$ 18,100.00	$   4,900.00	$ 13,200.00
3	$ 13,200.00	$   2,800.00	$ 10,400.00
4	$ 10,400.00	$   2,800.00	$ 7,600.00
5	$    7,600.00	$   2,800.00	$ 4,800.00
6	$    4,800.00	$   2,800.00	$ 2,000.00

Working:

Original Cost	$   23,000
Salvage Value original	$      3,400
Original Depreciable base	$   19,600
Original Life	4 Years
Original Straight Line depreciation (SLM)	$      4,900

At the end of 2 years

Original Cost	$ 13,200
Salvage Value original	$ 2,000
Original Depreciable base	$ 11,200
Original Life	4 Years
Original Straight Line depreciation (SLM)	$ 2,800

End of answer.

Thanks.