Question

Question: On January 2, 2017, the Matthews Band acquires sound equipment for concert performances at a cost of \(65,800. The band estimates it will use this equipment for four years. It estimates that after four years it can sell the equipment for \)2,000. Matthews Band uses straight-line depreciation but realizes at the start of the second year that due to concert bookings beyond expectations, this equipment will last only a total of three years. The salvage value remains unchanged. Compute the revised depreciation for both the second and third years.

Short answer

Depreciation for both second and third years is $21,266.66

Step-by-step solution

Revised depreciation method

Depreciation is based on estimates of salvage value and useful life. During the useful life of an asset, if our estimate of an asset’s useful life and/or salvage value changes, then we use the new estimate to compute depreciation for current and future periods. This means that we revise the depreciation expense computation by spreading the cost yet to be depreciated over the remaining useful life.

Computation of revised depreciation

The Depreciation expense for both second and third years is $21,266.66