Squid Roe, Inc.'s $48,000 sushi bar was originally expected to be used for eight years with no residual value. Depreciation on the bar was $6,000 per year for the past two years. In the third year, management changed the estimated life of the bar to be a total of only six years instead of eight. What should Squid Roe do?

Squid Roe should change annual depreciation expense to $9,000 per from year 3 through year 6.

Explanation:

The depreciation expense will have to change from year 3 through year 6 as a result of change from eight years to six years as follows:

Asset cost = $48,000

Depreciation expense for first two years = $6,000 * 2 = $12,000

Net book value after 2 years = Asset cost - Depreciation expense for first two years = $48,000 - $12,000 = $36,000

Remaining years after 2 years = 6 - 2 = 4

New annual depreciation expense = Net book value after 2 years / Remaining years after 2 years = $36,000 / 4 = $9,000

Therefore, Squid Roe should change annual depreciation expense to $9,000 per from year 3 through year 6.

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