SIMCO Company purchases a machine on 1/1/2020, at a cost of $24,000. The machine is depreciated using the straight-line method. The machine's useful life is estimated to be 5 years with a $4,000 salvage value. On 1/1/2022, management decides to change the useful life to 7 years, instead of 5 years, and keep salvage value the same.

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A:

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Q: SIMCO Company purchases a machine on 1/1/2020, at a cost of $24,000. The machine is depreciated…

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Depreciation Methods

The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.

Depreciation Accounting

In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.