Question

The Donut Stop acquired equipment for $11,000. The company uses straight-line depreciation and estimates a residual value of $2,200 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 $1,200 from the original estimate of $2,200.

Required:
Calculate how much the donut stop should record each year for depreciation in years 3 to 6?

Answer 1

Answer:

$1350

Explanation:

Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

depreciation expense under the initial assumptions

($11,000 - $2,200) / 4 = $2200

Accumulated depreciation at the end of year 2 = $2200 x 2 = $4400

Book value at the beginning of year 3 =  $11,000 - $4400 = $6600

Depreciation expense using the new assumptions

($6600 - $1200) / 4 = $1350