Question

Every computer that a business owner purchases will lose most of its value after 5 years of use. the owner plans to purchase a computer for $2.100 and replace it after 4 years.

The business owner bought a computer that cost $2,400 instead of $2,100. the owner plans to replace the computer after 3 years instead of 4 years. Comparing both methods, which statement is true about the remaining value of this computer after 3 years of use ?

Answer 1

Explanation:

a) Data and Calculations:

Estimated useful life of a computer = 5 years

Cost of a computer purchased = $2,400

Annual depreciation expense = $480 ($2,400/5)

This means that the business owner chooses to spread (expense) the cost of the computer over 5 years at a rate of $480.

After 3 years, the cost already expensed = $1,440 ($480 * 3)

The Remaining value of this computer after 3 years of use will be $960 ($2,400 - $1,440).

b) Depreciation is an accounting method for spreading (or expensing) the cost of a long-term asset over its useful life.