Question

The Donut Stop acquired equipment for $10,000. The company uses straight-line depreciation and estimates a residual value of $2,000 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 $1,000 from the original estimate of $2,000. 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 (Years 1 and 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

Cost of equipment	10000
Less; Accumulated depreciation (10000-2000/4*2)	4000
Book value, end of year 2	6000
Less: New residual value	-1000
New depreciable cost	5000
Remaining service life	4
Annual depreciation in years 3 to 6 (5000/4)	1250