Question

Digger Enterprises purchased equipment for $64,000. In addition, shipping charges of $800 were incurred to obtain the equipment. The company paid $5,000 to construct a foundation and install the equipment. The equipment is estimated to have a residual value of $6,000 at the end of its 5-year useful life. Using the straight-line method, what is the book value of the equipment at the end of the third full year of use?

a. $22,120
b. $28,400
c. $31,520
d. $25,520

Answer 1

Option (C) is correct.

Step-by-step explanation:

Total cost:

= Purchase cost + shipping charge + Installation charges

= $64,000 + $800 + $5,000

= $69,800

Depreciation expense:

= (Cost - Salvage value) ÷ Estimated Useful life

= ($69,800 - $6,000) ÷ 5

= $12,760 per year

Total depreciation expense up to 3rd year:

= $12,760 per year × 3

= $38,280

Therefore,

Book value of the equipment at the end of the third full year of use:

= Cost of equipment - Total depreciation expense up to 3rd year

= $69,800 - $38,280

= $31,520