The following information is available on a depreciable asset owned by Mutual Sa
ID: 2478575 • Letter: T
Question
The following information is available on a depreciable asset owned by Mutual Savings Bank: Purchase date June 1, Year 1 Purchase price $90,500 Salvage value $11,300 Useful life 9 years Depreciation method straight-line The asset's book value is $72,900 on June 1, Year 3. On that date, management determines that the asset's salvage value should be $6,300 rather than the original estimate of $11,300. Based on this information, the amount of depreciation expense the company should recognize during the last six months of Year 3 would be: A.4,757.14 B.2,378.57 C.,603.57 D.1,975.00 E.2,311.61
Explanation / Answer
If residual value is material in that case any change in residual value will be adjusted in future calculations of depreciation calculations by simply deducting the revised residual value from the carrying amount of asset in the year residual value changed.
Therefore, the revalued amount of asset will be the carrying amount of asset and residual value will be deducted from the same to compute depreciable amount which is to be reduced over the remaining useful life of asset.
Revised depreciable cost of the asset = $72900 - $6300 = $66600
Therefore, the amount of depreciation expense the company should recognize during the last six months of Year 3 would be = ($66600/7) * (1/2) = $4757.14
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