The donut stop acquired equipment for $19,000. the company uses straight-line depreciation and estimates a residual value of $3,000 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 $1,200 from the original estimate of $3,000. required: calculate how much the donut stop should record each year for depreciation in years 3 to 6.

Question

Cassie Stout

Business

12 November, 11:07

The donut stop acquired equipment for $19,000. the company uses straight-line depreciation and estimates a residual value of $3,000 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 $1,200 from the original estimate of $3,000. required: calculate how much the donut stop should record each year for depreciation in years 3 to 6.

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Solomon Vincent · Answer 1

The change in accounting estimates such as the life and residual value of a depreciable asset should be applied prospectively. During years 1 & 2, the depreciation is $4,000. However, at the end of year 2, the life of the asset was changed to 6 years and residual value is reduced to $1,200.

Thus, the depreciation starting year 3 is $2,450 computed as:

Cost of asset $19,000

Less: Depreciation (2 years) 8,000

Book Value $11,000

Divide by remaining life 4 years

Depreciation $2,750