Use the following data to answer questions 5 through 9:
Davis Company purchased a new piece of equipment on July 1, 2014 at a cost of $1,800,000. The equipment has an estimated useful life of 5 years and an estimated salvage value of $150,000. The current year end is 12/31/15. Davis records depreciation to the nearest month.
-If, at the end of 2016, Davis Company decides the equipment still has five more years of life beyond 12/31/16, with a salvage value of $150,000, what is straight-line depreciation for 2016? (Assume straight-line used in all years.)
A) $180,000.
B) $192,500.
C) $217,500.
D) $330,000.

Question

Quizplus · Accepted Answer

Straight-line depreciation is calculated by subtracting the estimated salvage value from the cost of the equipment and then dividing by the estimated useful life. 
Depreciation per year = ($1,800,000 - $150,000) / 5 = $330,000. 
Since Davis Company has decided that the estimated useful life of the equipment is still 5 years (until 12/31/21), the remaining depreciable base as of 12/31/16 is ($1,800,000 - $330,000 - $330,000) = $1,140,000. 
So, straight-line depreciation for 2016 would be ($1,140,000 / 5) = $228,000. However, Davis has already recorded depreciation of ($330,000 / 12) x 18 months (since July 1, 2014) = $148,500 in 2014 and 2015. 
Therefore, the remaining depreciation for 2016 is ($228,000 - $148,500) = $79,500. 
So, the straight-line depreciation for 2016 is $79,500/6 months = $15,900 per month or $15,900 x 12 = $192,500 for the entire year.

Use the Following Data to Answer Questions 5 Through 9