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O’Dell Vegetables purchased a harvesting machine on July 1, 2016, for $984,000. The machine was estimated to have a useful life of 8 years with an estimated salvage value of $140,000. O’Dell uses the straight-line method of depreciation. During 2019, it became apparent that the machine would become uneconomical after December 31, 2023, and that the machine would have no scrap value. What should be the charge for depreciation in 2019 under generally accepted accounting principles?

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Answer:

Depreciation expense in 2019 is $144,050

Explanation:

O’Dell Vegetables uses the straight-line method of depreciation, Depreciation Expense each year is calculated by following formula:

Depreciation Expense = (Cost of machine − Salvage Value )/Useful Life

From July 1, 2016 to 2018:

Annual Depreciation Expense = ($984,000 - $140,000)/8 = $105,500

Depreciation Expense in 2016 = $105,500x6/12 = $52,750

Accumulated Depreciation (end 2018) = $52,750 + $105,500 + $105,500 = $263,750

From 2019, the machine would become uneconomical after December 31, 2023:

Salvage Value = 0 and Remaining useful life = 5 year

Depreciation  Expense  = (Historical Cost - Accumulated Depreciation - Salvage Value) / Remaining Useful Life = ($984,000-$263,750-0)/5 = $144,050

Depreciation in 2019 is $144,050

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