Question

On January 1, 2016, Woodstock, Inc. purchased a machine costing $40,000. Woodstock also paid $1,000 for transportation and installation. The expected useful life of the machine is 6 years and the residual value is $5,000. How much is the annual depreciation expense assuming use of the straight-line depreciation method? a. $6, 100. b. $6,000. c. $5, 950. d. $5, 750

Answer 1

b. $6,000

Step-by-step explanation:

Depreciation is calculated on the cost of asset. Cost of asset includes the transportation and installation cost, because both are necessary in order to function the asset.

Accordingly total cost of asset = $40,000 + $1,000 = $41,000

Salvage value = $5,000

Thus, amount to be depreciated = $41,000 - $5,000 = $36,000

Useful life of the asset = 6 years

Straight line depreciation = $36,000/6 = $6,000 annually.