An asset was purchased for $120,000 on January 1, Year 1, and originally estimated to have a useful life of 10 years with a salvage value of $10,000. Straight-line method is used for depreciation. At the beginning of the third year, it was determined that the remaining useful life of the asset was only 4 years with a salvage value of $2,600. Calculate the third-year depreciation expense using the revised amounts and straight-line method.

Question

An asset was purchased for $120,000 on January 1, Year 1, and originally estimated to have a useful life of 10 years with a salvage value of $10,000.   Straight-line method is used for depreciation. At the beginning of the third year, it was determined that the remaining useful life of the asset was only 4 years with a salvage value of $2,600.  Calculate the third-year depreciation expense using the revised amounts and straight-line method.

BlackTom AI · Accepted Answer

First, let's restate the question and the given data to ensure clarity about the scenario and the calculations involved.
- An asset costs 120,000 with an estimated life of 10 years and a salvage value of 10,000. Straight-line depreciation is used.
- Each year for the first two years, depreciation would have been (Cost − Salvage) / Useful life = (120,000 − 10,000) / 10 = 11,000 per year.
- At the beginning of Year 3, a revision occurs: the remaining useful life is 4 years and the salvage value is 2,600. The carrying amount at this point is after two years of depreciation: 120,000 − 2 × 11,000 = 98,000.
- Now, apply the revised method: new depreciation base equals (carrying amount − new salvage value) = 98,000 − 2,600 = 95,400. The remaining life is 4 years, so annual depreciation under the straight-line method becomes 95,400 / 4 = 23,850.

Option-by-option analysis:
- None of the other three: This is a generic option that would be correct only if none of the numerical choices were right. Since we have a precise computation that yields 23,850, this option is not appropriate as the correct choice here. It’s a distractor.
- $24,000: This figure might arise if one incorrectly used 96,000 as the depreciable base (e.g., 98,000 carrying amount minus 2,000 salvage) or if one divided 96,000 by 4 years to get 24,000. However, the salvage value is 2,600, not 2,000, and the correct base is 95,400, not 96,000, so 24,000 overstates the depreciation.
- $25,000: This could result from using a round number or misapplying the remaining-life calculation, such as dividing 100,000 by 4 or similar. It ignores the revised salvage value and precise carrying amount, making it inconsistent with the given data.
- $23,850: This matches the precise calculation using the revised carrying amount and salvage value over the remaining 4 years: (98,000 − 2,600) / 4 = 95,400 / 4 = 23,850. It correctly accounts for the revised estimates and the remaining useful life.

In summary, the key steps are identifying the carrying amount after two years, applying the revised salvage value, dividing by the new remaining life, and arriving at the correct depreciation for Year 3 as 23,850. The other options are incorrect because they either misstate the salvage value, miscalculate the depreciable base, or rely on round numbers that don’t reflect the given revised estimates.

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