On July 1, 2019, Pharoah Company purchased new equipment for $80,000. Its estimated useful life was 8 years with a $16,000 salvage value. On January 1, 2022, before making its depreciation entry for 2022, the company estimated the remaining useful life to be 10 years beyond December 31, 2022. The new salvage value is estimated to be $5,000. Compute the revised annual depreciation on December 31, 2022.

Pharoah Company

Revised Annual Depreciation on Dec. 31, 2022:

= Depreciable amount divided by 10 years

= $55,000/10 = $5,500

Explanation:

a) Data:

July 1, 2019: Equipment Purchase $80,000

Estimated useful life = 8 years

Salvage value = $16,000

b) Computations:

Depreciable amount = $64,000 ($80,000 - 16,000)

Annual Depreciation Expense = $8,000 ($64,000/8)

Six months Depreciation Expense = $4,000 ($8,000/2)

c) Accumulated Depreciation from July 1, 2019 to Jan. 1, 2022:

July 1, 2019 to Dec. 31, 2019 = $4,000

Jan. 1, 2020 to Dec. 31, 2020 = $8,000

Jan. 1, 2021 to Dec. 31, 2021 = $8,000

Total  =      $20,000

d) Revision of Estimates:

Jan. 1, 2022, Book Value = Cost minus Accumulated Depreciation ( $80,000 - $20,000) = $60,000

Re-estimated salvage = $5,000

Depreciable amount  =$55,000

Remaining useful life = 10 years

Annual Depreciation Expense = $5,500 ($55,000/10)

e) Depreciation is an accounting estimate used as a way of expensing the cost of a fixed asset over its useful life.  It is in line with the accrual concept and matching principle of generally accepted accounting principles, which require expenses and revenues to be matched to the related period, expenses and revenues.  It is based on the judgement of management and can be revised in line with changing circumstances and judgements.  There are many methods for accounting for depreciation, including the straight-line as above, the unit of production method, double declining, sum of the years digit method, and accelerated methods like the MACRS or Modified Accelerated Cost Recovery System for tax accounting.