Question

Farmer Company purchased machine on January 1, Year 1 for $106,000. The machine is estimated to have a 5-year life and a salvage value of $15,000. The company uses the straight-line method. 24 At the beginning of Year 4, Farmer revised the expected life to eight years. What is the annual amount of depreciation expense for each of the remaining years in the machine's life? 02:28:24 Print Multiple Choice $7.280 $10,280 $6,425 $4,550

Answer 1

Question 24

Before diving into the question, you should know that, change in depreciation method is only a change in estimate and is not considered a change in accounting policy. So any changes are recorded prospectively.

Initial straight-line depreciation = (Price - Salvage value) / Useful life = ($106,000 - $15,000) / 5 years = $18,200

Depreciation for 3 years = $18,200 x 3 years = $54,600

Carrying value as on beginning of 4th year = $106,000 - $54,600 = $51,400

New useful life = 8 years of which 3 years already complete. So, balance 5 years.

New depreciation = (Carrying value - Salvage value) / Useful life = ($51,400 - $15,000) / 5 years = $7,280

Answer: -$7,280

Question 25

Since there is improvement in quality, there is future economic benefit from improvement. So, it should be capitalised

Initial depreciation = (Price - Salvage value) / Useful life = ($40,000 - $7,600) / 6 years = $5,400

Carrying value as on beginning of year 2 (after capitalizing improvement) = $40,000 - $5,400 + $13,000 = $47,600

New depreciation = (Carrying value - Salvage value) / Useful life = ($47,600 - $7,600) / 5 years = $8,000

Depreciation for 3 years (Year 2, Year 3 and year 4) = $8,000 x 3 = $24,000

Book value on Dec 31 Year 4 = $47,600 - $24,000 = $23,600

Answer: - $23,600