ITPEC FE Morning October 2022 Question 78
Company A purchased a machine for the original cost of $126,000. The salvage value after 6 years is $6,000. What is the annual depreciation expense (in dollars) by using the straight-line method?
Explanation
$20,000 — straight-line depreciation spreads cost minus salvage value evenly over the useful life.
- •Depreciable amount: 126,000 − 6,000 = 120,000 dollars
- •Annual depreciation: 120,000 ÷ 6 = 20,000 dollars
Check: after 6 years the book value is 126,000 − 6 × 20,000 = 6,000, the salvage value.
Answer (b)
Why not others:
- •(c) 21,000 — divides the full cost by 6, 126,000 ÷ 6, forgetting to subtract the salvage value
- •(a) 12,000 — too little: 6 × 12,000 = 72,000 would leave a book value of 54,000, not the 6,000 salvage value
- •(d) 36,000 — too much: 6 × 36,000 = 216,000, more than the machine cost
Key rule: Straight-line depreciation = (cost − salvage value) ÷ useful life, the same amount every year; check that the total over the life brings book value down to salvage value.
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