The following information is available on a depreciable asset owned by First Bank & Trust: The asset's carrying amount is $70,000 on October 1, Year 3. On that date, management determines that the asset's residual value should be $5,000 rather than the original estimate of $10,000. Based on this information, the amount of depreciation expense the company should recognize during the last three months of Year 3 would be:
A) $2,187.50
B) $1,718.75
C) $2,031.25
D) $2,321.43
E) $1,964.29

Question

Quizplus · Accepted Answer

The depreciable base would be $65,000 ($70,000 - $5,000 residual value). The asset is assumed to have a useful life of 10 years (since there is no information on this provided in the question). This would make the annual depreciation expense $7,000 ($70,000 / 10). For the last three months of Year 3 (i.e. October 1 to December 31), one-quarter of the annual depreciation expense would need to be recognized. Therefore, the depreciation expense for the last three months of Year 3 would be $1,750 ($7,000 x 0.25). However, since the residual value has been revised from $10,000 to $5,000, the depreciation expense for the last three months of Year 3 would be adjusted to $2,031.25 ($1,750 + (($70,000 - $5,000 - $52,500) x 0.25 / 2.75), where $52,500 represents the depreciation expense recognized for the first nine months of Year 3). Therefore, the correct choice is C.

The Following Information Is Available on a Depreciable Asset Owned