An asset was purchased for $138,000 on January 1, Year 1 and originally estimated to have a useful life of 8 years with a residual value of $10,500. At the beginning of the third year, it was determined that the remaining useful life of the asset was only 4 years with a residual value of $1,800. Calculate the third-year depreciation expense using the revised amounts and straight-line method.

The third-year depreciation expense: $26,081.25

Explanation:

The company uses straight-line depreciation method, Depreciation Expense per year is calculated by following formula:

Depreciation Expense = (Cost of asset - Residual Value) / Useful Life

Depreciation Expense for year 1 = ($138,000 - $10,500) / 8 = $15,937.5

Depreciation Expense for year 2 = ($138,000 - $10,500) / 8 = $15,937.5

At the end of year 2,

Accumulated depreciation = $15,937.5+$15,937.5=$31,875

Book vale of the asset = $138,000 - $31,875 = $106,125

At the beginning of the third year, the remaining useful life of the asset was 4 years with a residual value of $1,800.

Third-year Depreciation Expense = ($106,125 - $1,800) / 4 = $26,081.25