Question

Holt Company purchased a computer for \(8,000 on January 1, 2016. Straight-line depreciation is used, based on a 5-year life and a \)1,000 salvage value. In 2018, the estimates are revised. Holt now feels the computer will be used until December 31, 2019, when it can be sold for $500. Compute the 2018 depreciation.

Short answer

Answer

Depreciation for 2018 = $2,350

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Depreciation

Depreciation can be stated as the decline in the value of an asset over a useful period. All assets depreciate over time, except land, whose value increases with the passage of time. Among the various methods of depreciation, straight-line depreciation is considered to be the simplest and error-free method.

Computation of depreciation expense

Calculation of annual depreciation

$\begin{array}{c}\text{Depreciation\hspace{0.17em}expense}=\frac{\text{Cost\hspace{0.17em}of\hspace{0.17em}asset}-\text{Salvage\hspace{0.17em}value}}{\text{Useful\hspace{0.17em}life}}\\ =\frac{\$8,000-\$1,000}{5}\\ =\$1,400\end{array}$

Calculating book value on January 1, 2018

$\begin{array}{c}\text{Book\hspace{0.17em}value}=\text{Cost\hspace{0.17em}of\hspace{0.17em}asset}-\left(2\times \text{Depreciation\hspace{0.17em}expense}\right)\\ =\$8,000-\left(2\times \$1,400\right)\\ =\$5,200\end{array}$

Calculating depreciation expense for 2018

$\begin{array}{c}\text{Depreciation\hspace{0.17em}expense}=\frac{\text{Book\hspace{0.17em}value}-\text{Estimated\hspace{0.17em}value}}{2}\\ =\frac{\$5,200-\$500}{2}\\ =\$2,350\end{array}$