Accounting includes many “gray areas” where management has to make estimates and use judgment. This discussion board will also you to develop the estimated useful life and residual value for a new piece of equipment.
Suppose that you are a manager for November Enterprise, which just purchased a new piece of equipment for $9,700. You are trying to determine the estimated useful life and residual value for the new equipment for straight-line depreciation calculations. You perform some research and gather the following information for your estimates:
The old piece of equipment that this new purchase is replacing lasted for 7.5 years. November Enterprise sold the old equipment for $1,200.
A competitor in the same industry uses a useful life of 4 years and residual value of $3,500 for its equipment.
- November Enterprise predicts that equipment technology will change rapidly in the next 5 years. November Enterprise intends to start saving so they can upgrade equipment after the technology upgrades occur.
- An internet search shows that used equipment currently sells for approximately $1,000 (8 years old) to $6,000 (3 years old).
- Consider this information to make an estimate for the useful life and residual value of this equipment. There is no wrong answer, but please explain how you determined your estimates.
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