Answer:
Depreciation expense:
Year 1 = $27,500
Year 2 = $27,500
Year 3 = $37,500
Year 4 = $37,500
Explanation:
Annual depreciation is computed using the equation given below:
Annual depreciation = {Cost of machine - Salvage value} ÷ Estimated life
= {$135,000 - $25,000} ÷ 4
= $27,500
Depreciation of year 1 is $27,500
Cost of machine in year 2 is {$135,000 - $27,500} = $107,500
Depreciation of year 2 is $27,500
Cost of machine in year 3 is {$107,500 - $27,500} = $80,000
Annual depreciation is computed using the equation given below:
Annual depreciation = {Cost of machine - Salvage value} ÷ Remaining estimated life
= {$80,000 - $5,000} ÷ 2
= $37,500
Depreciation expense of year 3 is $37,500
Cost of machine in year 4 is ($80,000 - $37,500) = $42,500
Depreciation expense of year 4 is $37,500
Cost of machine at the end of year 4 is ($42,500 - $37,500) = $5,000
Answer:
Year Depreciation
1 $27,500
2 $27,500
3 $37,500
4 $37,500
Explanation:
The cost of Property, plant, and equipment is charged to P&L evenly under straight-line depreciation method. The depreciation under this method is calculated as:
Annual Depreciation Expense = (Cost - Salvage Value) / Useful Life
⇒ The annual depreciation is $27,500 [(135,000 - 25,000) / 4].
This amount will be charged as depreciation expenses in P&L statements each year for the life of asset because the cost is allocated evenly under straight-line method. But at the beginning of 3rd year, the management has decided to revise the salvage value. It is a change of accounting estimate and not error, so the depreciation expense of two years that is already recorded will not be changed. However, the depreciation of the remaining two years should be revised. The formula to it is:
Revised Depreciation = (BV - RSV) / Remaining Useful Life
where
BV = Book value = Cost - Accumulated depreciation
= 135,000 - (27,500 * 2) = $80,000
RSV = Revised Salvage Value = $5,000
⇒ Depreciation expense that is to charged to P&L each year for the last two remaining years is $37,500 [(80,000 - 5,000) / 2].
