James, Inc. discovered that equipment purchased three years ago for $600,000 will not last as long as originally estimated. The firm was depreciating the equipment at the rate of $80,000 per year with an estimated salvage value of $40,000. New estimates indicate that the equipment will last a total of five years with no salvage value. How much should James Inc. record as depreciation in year four?
The 3 years depreciation is: (3*80,000): 240,000
The Asset Net Book Value at the end of third year is: (600,000-240,000) : 360,000
Depreciation in Year: 4: (360,000/5) : 72,000 / Year.
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To determine the amount of depreciation that James, Inc. should record in year four, we need to consider the new estimates for the equipment's useful life and salvage value.
The original estimate for the useful life of the equipment was three years with a salvage value of $40,000. This means that over the course of three years, the equipment was expected to depreciate by $560,000 ($600,000 - $40,000).
However, the new estimate suggests that the equipment will actually last a total of five years with no salvage value. Since three years have already passed, we need to calculate the remaining depreciation for the remaining two years.
To do this, we subtract the amount already depreciated from the original cost of the equipment: $600,000 - $560,000 = $40,000.
Since there is no longer any salvage value, the depreciation for the remaining two years is simply spread evenly over those years: $40,000 / 2 = $20,000 per year.
Therefore, James, Inc. should record $20,000 as depreciation in year four.