Question

Leslie, Inc., followed the practice of depreciating its building on a straight-line basis. A building was purchased in 2016 and had an estimated useful life of 25 years and a residual value of $20,000.

The company's depreciation expense for 2016 was $15,000 on the building.

What was the original cost of the building?
a. $395,000
b. $500,000
c. $520,000
d. Cannot be determined from the information given.

Answer 1

a. $395,000

Step-by-step explanation:

Since the depreciating method is practiced in a straight-line basis, the equation for the value of the building as a function of the time in years (V(t)) is:

`V(t) = -kt + C`

Where k is the yearly depreciation rate of $15,000 per year and C is the initial cost.

For t = 25 years, V(t) = $20,000. Thus:

`V(t) = -15,000t + C\\V(25) = 20,000 = -15,000*25 +C\\C= 20,000 + 15,000*25\\C= 395,000`

The original cost of the building was $395,000