Renewable Energies, Inc. (REI) paid $100,000 to purchase a windmill. The windmill was expected to have an 8 year useful life and a $20,000 salvage value. At the beginning of the fifth year of operation, REI changed the estimated useful life from 8 years to 14 years. Assuming the Company uses the straight-line method, the amount of depreciation expense on the Year 5 income statement would be

The amount of depreciation on the year 5 income statement would be $4000

Explanation:

The following data were provided;

Cost of the asset = $100,000

Salvage value = $20,000

Estimated useful life= 8 years

Depreciation method = straight-line method.

Solve;

Annual depreciation expense = (cost of the asset - salvage value) ÷ useful life

= ($100,000 - $20,000) ÷ 8 = $10,000

Therefore, depreciation accumulated for the first four years = $10,000 × 4 = $40,000

At the end of year 4,

The book value of the asset = cost of the asset - accumulated depreciation

= $100,000 - $40,000 = $60,000

The revised estimated life of the asset = 14 years.

The remaining years left starting from the year 5,

= 14- 4 = 10 years

Revised annual depreciation expense

= ($60,000 book value - salvage value) ÷ useful life

= ($60,000 - $20,000) ÷ 10

= $4,000

Therefore, the amount of depreciation on the year 5 income statement would be $4000

The amount of accumulated depreciation on the Year 6 balance sheet would be $48,000.

Explanation:

You’ll need to first Calculate first the annual depreciation for 4 years with use of the straight line method:

The Annual 4 years depreciation = useful life/(cost - salvage value) = (100,000 - 20,000) / 8 = 10,000

So, by the above calculation, the accumulated depreciation for 4 years will be 10,000 x 4 = 40,000

The Book value prior to the change of useful life = Cost - Accumulated depreciation = 100,000 - 40,000 = 60,000

The revised estimated life of the asset = 14 years.

The remaining years left starting from the year 5,

= 14- 4 = 10 years

Revised annual depreciation expense

= ($60,000 book value - salvage value) ÷ useful life

= ($60,000 - $20,000) ÷ 10

= $4,000

So, the 5th year accumulated depreciation will be = $4,000

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