A company owns an operational asset acquired on January 1, 2006 at a cost of $10,000. It had an estimated useful life of 5 years, no residual value, and was being depreciated on a straight-line basis. On December 31, 2007, it was determined that the total useful life would be 4 years. The following adjusting entry (assuming no adjusting entries have been made) for the accounting year ended December 31, 2007 should be made (rounded to the nearest dollar): $\begin{array}{|l|l|l|l|}
\hline 1&\text { Depreciation expense } & 2,667 & \
\hline &\text { Accumulated depreciation } & & 2,667 \
\hline 2&\text { Depreciation expense } & 2,000 & \
\hline &\text { Accumulated depreciation } & & 2,000 \
\hline 3&\text { Retained Earnings } & 500 & \
\hline &\text { Accumulated depreciation } & & 500 \
\hline 4&\text { Retained Earnings } & 667 & \
\hline &\text { Accumulated depreciation } & & 667 \
\hline
\end{array}$
A) Choice 1
B) Choice 2
C) Choice 3
D) Choice 4

Question

Quizplus · Accepted Answer

Initially, the asset was depreciated over 5 years, which means an annual depreciation of $2,000 ($10,000 / 5). After 2 years (by the end of 2007), $4,000 would have been depreciated. However, with the revision to a 4-year total useful life, the total depreciation over 4 years should be $10,000, leaving $6,000 to be depreciated over the remaining 2 years. Therefore, the depreciation expense for 2007 should be increased to $3,000 for each of the remaining years (2007 and 2008). Since $2,000 was already accounted for in 2006, an additional $1,000 for 2006 and $3,000 for 2007 need to be recognized in 2007, totaling $4,000. However, since $2,000 was already expensed in 2006, the adjustment in 2007 should be for the additional $2,000 needed to catch up for 2006 plus the $3,000 for 2007, totaling $5,000. The correct entry is not explicitly listed, indicating a misunderstanding in the question's setup or a mistake in the provided choices. The correct depreciation expense for 2007, considering the adjustment, should be $5,000, not matching any of the choices given. The explanation provided aims to correct the understanding based on the asset's revised useful life and depreciation calculation.

A Company Owns an Operational Asset Acquired on January 1