Question

6 Exercise 7-14A Determine depreciation expense for a change in depreciation estimate (L07-4) 15 points The Donut Stop acquired equipment for $25,000. The company uses straight-line depreciation and estimates a residual value of $5,000 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 $3,000 from the original estimate of $5,000. eBook Required: Calculate how much The Donut Stop should record each year for depreciation in years 3 to 6. 101 Hint Print 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 Reference

Answer 1

Answer:

Particulars	Amount
Cost of The Equipment	$25000
Less: Accumulated Depreciation Year 1 and Year 2	($10000)
Book Value at the end of Year 2	$15000
Less: New Residual Value	($3000)
New Depreciable Cost	$12000
Remaining Service Life	4 years
Annual Depreciation in years 3 to 6	$3000 per year

Workings:

Depreciation from year 1 and Year 2 :

Depreciation = (Cost - Salvage VAlue)/ Useful life of Asset

($25000 - $5000)/4

=$20000/4

= $5000 per year

Accumulated Depreciation for year 1 and year 2 = $5000*2 = $10000

Depreciation for year 3 to 6

Book Value at the end of year 2 = $15000

Residual Value id Revised to $3000 and Useful life is Increased to 6 years

Remaining useful life of asset = 4 years

Depreciation = ($15000 -$3000)/ 4 =$3000