Lexis Company purchased equipment on 1 January 2012 for $35 500. The estimated useful life of the equipment was 7 years and the estimated residual value was $4 000. After using the straight-line method of depreciation for 3 years, the total estimated useful life was revised to 9 years on 1 January 2015. How much is depreciation expense for 2015?
Question
Lexis Company purchased equipment on 1 January 2012 for 4 000. After using the straight-line method of depreciation for 3 years, the total estimated useful life was revised to 9 years on 1 January 2015. How much is depreciation expense for 2015?
Solution
To calculate the depreciation expense for 2015, we need to follow these steps:
Step 1: Calculate the annual depreciation expense for the first 3 years using the straight-line method.
The formula for straight-line depreciation is: (Cost of Asset - Salvage Value) / Useful Life of Asset
So, for the first 3 years, the annual depreciation expense is: (4,000) / 7 = $4,500
Step 2: Calculate the total depreciation for the first 3 years.
Total depreciation for the first 3 years is: 13,500
Step 3: Calculate the book value of the equipment at the end of 2014 (before the change in estimate).
The book value is: 13,500 (total depreciation for the first 3 years) = $22,000
Step 4: Calculate the new annual depreciation expense for the remaining years after the change in estimate.
The new estimated useful life is 9 years, but 3 years have already passed, so the remaining useful life is 6 years.
The new annual depreciation expense is: (4,000) / 6 = $3,000
So, the depreciation expense for 2015 is $3,000.
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