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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Bradley Company purchased a machine for $34,000 on January 1, 2017. It depreciates the machine using the straight-line method over a useful life of 8 years and a $2,000 residual value. On January 1, 2019, Bradley revised its estimate of residual value to $1,000 and shortened the machine’s useful life to 4 more years. Depreciation expense for 2019 is:

a. $4,000.

b. $5,750.

c. $6,000.

d. $6,250.

To determine

Depreciation:

The depreciation is the expense which is debited to the income statement in the ratio of the period of the respective asset. It is an estimate only as it is computed on the basis of estimated life and the scrap value estimated by the company using that asset.

To select:

The correct amount of depreciation.

Explanation

The Chapman Inc. acquired a machine on January 1,2017 with the following information:

Purchase Cost=$34,000Residual Value=$2,000Life of Asset=8 years

The above data is given in the question and this data is revised on January 1,2019 which is also given in the question which is as follows:

Residual Value=$1,000Life of Asset=4 years

Now, for calculating the depreciation it is to be understood that in the case of revision in the terms of residual value and life of asset, the cost of asset is to be ascertained of that date on which revision in these are done. The cost of asset is determined on that date by deducting the cost with the depreciation up to that date. Then, such revised cost is used with the other revised values to calculate the new depreciation expense.

Old Deprecitaion=Cost of assetResidual valueLife of asset=$34,000$2,0008=$4,000

Now, computation of new depreciation is as follows:

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