On January 1, Year 1, Stewart Corporation purchased equipment for $120,000. A discount of 2% was granted on the equipment; the shipping terms were FOB shipping point, and the freight cost was $3,000. Installation and testing costs amounted to $4,000. The equipment had an estimated useful life of 4 years and salvage value of $10,000. At the beginning of Year 3, Stewart revised the expected life of the asset to six years and the salvage value to $12,000.Required:Compute the depreciation expense using straight-line method for each of the six years.
What will be an ideal response?
Original cost = $120,000 - $2,400 discount + $3,000 shipping + $4,000 installation = $124,600
First two years' depreciation = ($124,600 - $10,000) ÷ 4 = $28,650/year
Accumulated depreciation at end of second year = $57,300
Book value prior to change in estimate = $124,600 - $57,300 = $67,300
New depreciation = ($67,300 - $12,000) ÷ 4 = $13,825 per year
| 2016 | $ 28,650 |
| 2017 | 28,650 |
| 2018 | 13,825 |
| 2019 | 13,825 |
| 2020 | 13,825 |
| 2021 | 13,825 |
| $ 112,600 |
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