Question

An asset is purchased for $20,000. It has an estimated residual value of $5,000 and an estimated useful life of ten years. After three years of use, the estimated residual value is revised to $4,000. Assuming straight-line depreciation, depreciation expense in year four of use would be

Answer 1

$2,875

Formula (Cost – Residual Value) / Estimated Life = Annual Depreciation

Depreciation for the first three years = [($20,000 - $5,000) ÷ 10] × 3 = $4,500

Book value at the end of the fourth year = $20,000 - $4,500 = $15,500

Depreciation expense the third year = ($15,500 - $4,000) / 4 = $2,875 per yr.