On January 1, Year 1, Li Company purchased an asset that cost $45,000. The asset had an expected useful life of five years and an estimated salvage value of $9,000. Li uses the straight-line method for the recognition of depreciation expense. At the beginning of the fourth year, the company revised its estimated salvage value to $4,500. What is the amount of depreciation expense to be recognized during Year 4? Multiple Choice $18,900 $7,200 $9,450 $11,700

$9,450

Explanation:

In straight line depreciation the Depreciable value (Cost of asset - Salvage value of asset) is expensed over useful life of the asset. Each year same value of expense is charged.

When the salvage value is revised the value of depreciation will also be revised.

First we will calculate the Book value at the beginning of year 4.

Depreciable value = $45,000 - $9,000 = $36,000

Depreciation per year = $36,000 / 5 years = $7,200 per year

Book Value at start of year 4 = $45,000 - ($7,200 x 3 ) = $23,400

after revision of salvage value:

Depreciable value at start of year 4 = $23,400 - $4,500 = $18,900

Numbers of year remaining = 5 - 3 = 2 years

Depreciation each year = $18,900 / 2 = $9,450  

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