Proctor Papers purchased a machine on January 1,2020 at a cost of $380,000 with an estimated residual value of $30,000 at the end of its estimated useful life of 8 years.On January 1,2022 Proctor Paper estimates that the machine only has a remaining life of 5 years and a residual value of $20,000.Proctor Paper uses straight-line depreciation.Depreciation expense for 2022 would be
A)$48,500.
B)$54,500.
C)$57,000.
D)$72,000.

Question

Quizplus · Accepted Answer

Using the straight-line depreciation method, the annual depreciation expense can be calculated as follows:

Cost - Residual value
-------------------------------
Useful life

For the machine purchased on January 1, 2020:

Depreciation expense per year = ($380,000 - $30,000) / 8 = $47,500

On January 1, 2022, Proctor Paper estimates that the remaining useful life of the machine is 5 years, and the residual value is $20,000. At this point, the machine has already been used for 2 years. Therefore, the total remaining depreciation expense for the machine can be calculated as follows:

Total remaining depreciation expense = Depreciation expense per year x Remaining useful life
                                                             = $47,500 x 5
                                                             = $237,500

But, since the residual value has also changed, the remaining book value of the machine can be calculated as follows:

Book value = Cost - Total accumulated depreciation
                = Cost - (Depreciation expense per year x Years used)
                = $380,000 - ($47,500 x 2)
                = $285,000

Since the residual value is estimated to be $20,000, the remaining depreciation expense can be adjusted as follows:

Remaining depreciation expense = Book value - Residual value
                                             = $285,000 - $20,000
                                             = $265,000

This remaining depreciation expense needs to be allocated over the remaining useful life of the machine, which is 5 years. So, the annual depreciation expense for 2022 would be:

Annual depreciation expense = Remaining depreciation expense / Remaining useful life
                                           = $265,000 / 5
                                           = $53,000

Therefore, the correct answer is B) $54,500.

Proctor Papers Purchased a Machine on January 1,2020 at a Cost