Question

1. Change in depreciable life and salvage (residual) value

Thomson Corp. acquired computer equipment on January 1, 2006 for $10,000,000. The computer equipment has an estimated useful life of 6 years and $1,000,000 estimated salvage (residual) value. The firm uses the straight line depreciation method. On January 1, 2008, the firm discovered that the new technologies make it likely that the computer equipment will last only 4 years in total and that the estimated salvage (residual) value will be only $600,000.

Questions:

Compute the amount of depreciation expense for 2008 after this change in depreciable value and salvage (residual) value. Assume that the change does not represent an impairment loss.

Answer 1

Cost on January 1,2006     = $10000000

Accumulated depreciation for years 1 and 2 : = $3000000

( $10000000 - $1000000)/6 years × 2 years

Written down value on January 1, 2008 =$7000000

Revised salvage value = $600000

Revised total useful life of computer = 4 years

Remaining allocated period = 4 years - 2 years =2 years

Depreciation for year 2008 :

( $7000000 - $600000) / 2 years =$3200000

Therefore, depreciation expense for the year 2008 is $3200000

depreciation = (value of assest - salvage value)/ useful life of asset