Question

Continuing from Question 2. Scenario B: Desert, Co. purchased a truck for $50,000 on January 1, 2016. The truck had an estimated salvage value of $5,000 and an estimated useful life of 10 years. Desert uses the straight-line depreciation method. On January 1, 2019 Desert revised the estimated salvage value to $10,000, but did not change the useful life. The accountant recorded depreciation expense using the old salvage value when calculating the $500,000 ICO. 1. Is an adjustment needed to Desert's Income for Continuing Operations for 2019? [Select) 1A. If yes, what type of adjustment? (Select) 13. If yes, what is that amount of the adjustment needed? Select

1B options-

Answer 1

Solution :

Answer : Increases ICO $500

Depreciation as per Straight Line method = (Cost of Asset - Salvage value) /Life of Asset
➡ Annual Depreciation as per old salvage value = (50,000-5,000)/10
=45,000/10 = 4,500

➡ Annual Depreciation as per revised salvage value =(50,000-10,000)/10
=40,000/10 = 4,000

As per old salvage value ICO is $500,000, Depreciation charged was $4,500.
But as per revised salvage value, depreciation must be charged only for $4,000.

So ICO must be $500($4,500-$4,000) more.

So ICO must be increased by $500.