Question

On January 1, Jamaica Company purchased equipment for $18,000. The estimated salvage value is $4,000 and the estimated useful life is 5 years. On December 31 of the fourth year, and before adjusting entries have been made, the company decided to extend the estimated useful life of the equipment by two years giving it a total life of 7 years. The company did not change the salvage value and continues to use the straight-line method. What is the depreciation expense for the fourth year?
a) $4,000
b) $2,000
c) $2,800
d) $1,400
e) $1,500

Answer 1

Answer:

Option (d) is correct.

Explanation:

Depreciation per year = (Cost - Salvage value) ÷ useful life

= (18,000 - 4000) ÷ 5

= 2,800 per year

Book value at the beginning of fourth year :

= 18,000 - (3 years × 2,800)

= 9,600

Now the estimated life is changed to 7 years. But 3 years have already passed.

So, remaining life = 4 years

Depreciation for fourth year = (9,600 - 4,000) ÷ 4

                                                 = 1,400