Multiple Choice
A change in the estimated useful life of equipment requires:
8. Long Lived Assets
Change in Estimate: Depreciation
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Roller Coaster Tycoons purchased a concession stand for $360,000. Initially, the concession stand was depreciated straight-line over a ten year useful life with no residual value. After six years in use, RCT assessed that the concession stand would be useful for only two more years. What is depreciation expense in year 7?
A
$18,000
B
$36,000
C
$54,000
D
$72,000
E
$90,000
Verified step by step guidance1
First, calculate the annual depreciation expense using the straight-line method for the initial useful life of ten years. The formula is: \( \text{Annual Depreciation} = \frac{\text{Cost} - \text{Residual Value}}{\text{Useful Life}} \). Since the residual value is zero, it simplifies to \( \frac{360,000}{10} = 36,000 \).
Determine the accumulated depreciation after six years. Multiply the annual depreciation by the number of years: \( 36,000 \times 6 = 216,000 \).
Calculate the book value of the concession stand at the end of year 6 by subtracting the accumulated depreciation from the original cost: \( 360,000 - 216,000 = 144,000 \).
Reassess the useful life of the asset. After six years, the concession stand is expected to be useful for only two more years. Therefore, the new annual depreciation expense is calculated by dividing the remaining book value by the revised useful life: \( \frac{144,000}{2} = 72,000 \).
The depreciation expense for year 7 is the newly calculated annual depreciation amount, which is \$72,000.
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