Farmer Company purchased equipment on January 1, Year 1 for $81,000. The machines are estimated to have a 5-year life and a salvage value of $10,000. The company uses the straight-line method. At the beginning of Year 4, Farmer revised the expected life to eight years. What is the annual amount of depreciation expense for each of the remaining years in the machine’s life?

$5,680

Explanation:

Depreciation is the systematic allocation of the cost of an asset to the income statement over the estimated useful life of that asset.

It is determined as the depreciable value of the asset over the estimated useful life of the asset where the depreciable value is the difference between the cost and salvage value of the asset

Mathematically,  

Depreciation = (Cost - Salvage value)/Estimated useful life

Depreciation = (81,000 - 10,000) / 5

= $14,200

At the beginning of Year 4, Farmer revised the expected life to eight years. This means that the asset had been used for 3 years

Net book value then

= $81,000 - 3($14,200)

= $38,400

Remaining useful life is then 5 years

Annual depreciation (with no review of the residual value)

= ($38,400 - $10,000)/5

= $28,400/5

= $5,680

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