Question

Trainor Corporation purchased equipment on January 1, 2020 at a cost of $500,000. The equipment has an estimated residual value of $50,000 and an estimated life of 5 years. At the end of two years, Trainor reevaluated the useful life of the equipment. Management extended the total useful life an additional 5 years but estimated that the equipment would have no residual value at the end of this time. If the company uses straight-line depreciation, what amount would be recorded as depreciation expense each year, beginning with the third year

Answer 1

Answer:

Depreciation per year $40,000

Explanation:

The computation of the depreciation expense each year, beginning with the third year is shown below:

Purchase cost $500,000

Less residual value -$50,000

Depreciable cost $450,000

Depreciation per year $90,000 ($450,000 ÷ 5 years)

For two years, the depreciation is $180,000

Book value at the end of the 2nd year is $320,000

($500,000 - $180,000)

Depreciation per year $40,000 ($320,000 ÷ 8 years)