Question

Changing the estimated life of an asset

Assume that Smith’s Auto Sales paid $45,000 for equipment with a 15-year life and zero expected residual value. After using the equipment for six years, the company determines that the asset will remain useful for only five more years.

Requirements

1. Record depreciation expense on the equipment for Year 7 by the straight-line method.

2. What is accumulated depreciation at the end of Year 7?

Short answer

1. Depreciation for the 7^th year is $5,400.
2. Accumulated depreciation up to the 7^th year is $23,400.

Step-by-step solution

Definition of Depreciation

The expenses charged to report the decline in the value of the fixed assets acquired by the company are known as depreciation expenses. Such expenses are reported in the statement reporting net income.

Depreciation expenses on the equipment for 7th year

$\begin{array}{rcl}Depreciationfor7thyear& =& \frac{Cost-Salvagevalue-Accumulateddepreciation}{Usefullife}\\ & =& \frac{\$45,000-\$0-\$18,000}{5}\\ & =& \$5,400\end{array}$

Working note: Calculation of Accumulated depreciation up to 6 year:

$\begin{array}{rcl}Accumulateddepreciationupto6thyear& =& \frac{Cost-Salvagevalue}{Usefullife}\times 6\\ & =& \frac{\$45,000-\$0}{15}\times 6\\ & =& \$18,000\end{array}$

Accumulated depreciation at the end of the 7th year

Particular	Amount $
Depreciation for 7th year	$5,400
Add: Accumulated depreciation up to 6th year	18,000
Accumulated depreciation	$23,400