In: Accounting
reen Garden Company purchased a tractor at a cost of $240,000 on January 1, 2015. The tractor
has an estimated residual value of $40,000 and an estimated life of 8 years. At the end of two years
of service, Green Garden Co. reevaluated the tractor’s useful life. Management extended the useful
life an additional four years, but estimated that the tractor would have no residual value at the end of
this time.
If the company uses straight-line depreciation, what amount would be recorded as the depreciation
expense each year, beginning with the third year?
This is the case of revision in estimated life of the asset.
In case during the life of asset, the company estiamte that the anticipate life of asset is higher than what they estimated before. The remaining amount of asset is depreciated over the revised estimated life of the asset.
Hence, we need to find out first the carrying value of asset at the point when the life of asset is revised i.e. at the end of Year 2)
Depreciation Expense for First 2 Years
Year 1 Depreciation Expense = (Cost of Asset 240,000 - Residual Value $40,000) / Estimated life 8
= $25,000
Year 2 Depreciation Expense = $25,000
Accumulated Depreciation at the end of Year 2 = 25,000 + 25,000 = $50,000
Carrying Value of The Asset at the end of Year 2 = Cost of Asset $240,000 - Accumulated Depreciation till year 2 i.e. $50,000 = $190,000
Now, the Carrying Value will be treated as the cost of asset since the company made revision in estimated life of asset.
Total Esimated Life remaining of the asset = Total Estimated Life before revision 8 Year - 2 Years already passed + Revision in Life 4 Year = 10 Years
Now, the Value of Asset (Carrying Value) $190,000 will be depreciated over the 10 Years by using straight line method.
Depreciation Expense beginning with the third year = ($190,000 - Residual Value 0) / 10 Years = $19,000