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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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BuyFindarrow_forward

Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Revision of Depreciation

On January 1, 2017, Blizzards-R-Us purchased a snow-blowing machine for $125,000. The machine was expected to have a residual value of $12,000 at the end of its 5-year useful life. On January 1, 2019, Blizzards-R-Us concluded that the machine would have a remaining useful life of 6 years with a residual value of $3,600.

Required:

1. Determine the revised annual depreciation expense for 2019 using the straight-line method.

2. CONCEPTUAL CONNECTION How does the revision in depreciation affect the Blizzards-R-Us financial statements?

To determine

Concept introduction:

Straight-line Depreciation:

Depreciation is done by allocating the cost of the fixed assets other than land to expense over the useful life of the asset. The most commonly used method of depreciation is straight line method. In this method every year until the useful life of the asset, equal amount of assets cost to depreciation expense is allocated. The formula to calculate straight line depreciation is:

Straight line depreciation = (cost − residual value) / expected useful life

Requirement 1:

Compute the revised annual depreciation expense of snow-blowing machine for 2019.

Explanation

First let us calculate the depreciation expense for the years 2017 and 2018 before revision to determine the book value of the machine on beginning of 2019.

Depreciation expense

= (cost − residual value) / expected useful life

= (125000 − 12000) / 5 = 22600

End of Year Depreciation expense Accumulated Depreciation Book Val...
To determine

Concept introduction:

Straight-line Depreciation:

Depreciation is done by allocating the cost of the fixed assets other than land to expense over the useful life of the asset. The most commonly used method of depreciation is straight line method. In this method every year until the useful life of the asset, equal amount of assets cost to depreciation expense is allocated. The formula to calculate straight line depreciation is:

Straight line depreciation = (cost − residual value) / expected useful life

Requirement 2:

To explain:

What effect does the revised depreciation has on the Blizzards-R-Us financial statements.

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