Questions: Multiple Choice Question Tops Co. purchases equipment for 12,000 and has been using straight-line depreciation, estimating a 5-year life and 500 salvage value. At the beginning of the third year, Tops decides to use the equipment for a total of 6-years with no salvage value. Compute the revised depreciation for the third year. 1,250 1,850 2,375 2,875

Multiple Choice Question

Tops Co. purchases equipment for 12,000 and has been using straight-line depreciation, estimating a 5-year life and 500 salvage value. At the beginning of the third year, Tops decides to use the equipment for a total of 6-years with no salvage value. Compute the revised depreciation for the third year.
1,250
1,850
2,375
2,875

Transcript text: Multiple Choice Question Tops Co . purchases equipment for $\$ 12,000$ and has been using straight-line depreciation, estimating a 5 -year life and $\$ 500$ salvage value. At the beginning of the third year, Tops decides to use the equipment for a total of 6 -years with no salvage value. Compute the revised depreciation for the third year. $\$ 1,250$ $\$ 1,850$ $\$ 2,375$ $\$ 2,875$

Solution

Solution Steps

To solve this problem, we need to first calculate the annual depreciation using the original estimates and then determine the accumulated depreciation by the end of the second year. Next, we calculate the book value at the beginning of the third year. With the revised estimates, we compute the new annual depreciation over the remaining useful life of the equipment.

Step 1: Calculate Original Annual Depreciation

The original annual depreciation is calculated using the formula:

\[ \text{Original Annual Depreciation} = \frac{\text{Original Cost} - \text{Original Salvage Value}}{\text{Original Life}} = \frac{12000 - 500}{5} = 2300 \]

Step 2: Calculate Accumulated Depreciation

By the end of the second year, the accumulated depreciation is:

\[ \text{Accumulated Depreciation} = \text{Original Annual Depreciation} \times 2 = 2300 \times 2 = 4600 \]

Step 3: Calculate Book Value at the Beginning of the Third Year

The book value at the beginning of the third year is:

\[ \text{Book Value} = \text{Original Cost} - \text{Accumulated Depreciation} = 12000 - 4600 = 7400 \]

Step 4: Calculate Revised Annual Depreciation

With the revised estimates, the remaining life is $6 - 2 = 4$ years, and the revised salvage value is $0$. The revised annual depreciation is calculated as:

\[ \text{Revised Annual Depreciation} = \frac{\text{Book Value} - \text{Revised Salvage Value}}{\text{Revised Life Remaining}} = \frac{7400 - 0}{4} = 1850 \]