Swift Company purchased a machine on January 1, 2012, for $600,000. At the date
ID: 2490870 • Letter: S
Question
Swift Company purchased a machine on January 1, 2012, for $600,000. At the date of acquisition, the machine had an estimated useful life of six years with no salvage. The machine is being depreciated on a straight-line basis. On January 1, 2015, Swift determined, as a result of additional information, that the machine had an estimated useful life of eight years from the date of acquisition with no salvage. An accounting change was made in 2015 to reflect this additional information. What is the amount of depreciation expense on this machine that should be charged in Swift's income statement for the year ended December 31, 2015?
a. $ 60,000
b. $ 75,000
c. $120,000
d. $150,000
I know the answer is A but need to show work
Explanation / Answer
Answer: a) $60000
Annual depreciation before the change in the estimate
= (cost - salvage value) / useful life in years
= ($600000 - $0) / 6
= $100000
Depreciation for three yers (from Jan 1, 2012 to Dec 31, 2014) = 3 x $100000 = $300000
Written down value as on Jan 1, 2015 = $600000 - $300000 = $300000
Remaining useful life according to new estimate = 8 years - 3 years = 5 years.
Annual depreciation expense to be charged in Swift's income statement for the year ended December 31, 2015
= (Written down value as on Jan 1, 2015) / (Remaining useful life according to new estimate)
= $300000 / 5 years = $60000 per year
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