Question

Omaha Beef Co. purchased a delivery truck for $50,000. The residual value at the end of an estimated eight-year service life is expected to be $10,000. The company uses straight-line depreciation for the first six years. In the seventh year, the company now believes the truck will be useful for a total of 10 years (four more years), and the residual value will remain at $10,000.

Calculate depreciation expense for the seventh year.

Answer 1

Solution:

The problem is related to the life revision of Asset. The change in the estimate of asset life is reported in the current year and prospective years. The balance reported previously i.e. beginning balances, is not required to be adjusted to show the change in life.

First we need to calculate accumulated depreciation for 6 years i.e. till the date of revision of estimated useful life.

Annual Depreciation (straight line method) = (Cost of Asset $50,000 – salvage value $10,000) / Estimated Useful life before revision 8

= $5,000

Accumulated Depreciation for 6 years = Annual Depreciation $5,000 * 6 Years= $30,000

After 6 years, the estimated useful life is revised by the company. It is increased to 4 more years.

Calculation of Depreciation after revision of useful life of asset = ((Cost of Asset $50,000 – Accumulated Depreciation for 6 years $30,000) – Residual Value $10,000) / Remaining Useful life 4 years

= $2,500

Depreciation Expense for seventh year = $2,500