Question

A purchase of equipment includes a purchase price of $18,000, freight charges of $500 and installation costs of $2,500. The estimated salvage value and useful life are $3,000 and five years, respectively. Under the straight-line method, how much is annual depreciation expense?

Answer 1

To find the annual depreciation expense using the straight-line method, subtract the salvage value from the total cost of the equipment to get the depreciable base, and then divide that by the equipment's useful life. The annual depreciation expense in this case is $3,600.

Step-by-step explanation:

To calculate the annual depreciation expense using the straight-line method, we first need to determine the asset's depreciable base. The depreciable base is calculated by subtracting the estimated salvage value from the total cost of the equipment, which includes the purchase price, freight charges, and installation costs.

The total cost of the equipment is the sum of the purchase price ($18,000), freight charges ($500), and installation costs ($2,500), which equals $21,000. We subtract the estimated salvage value of $3,000 from this total cost, resulting in a depreciable base of $18,000. Since the useful life of the equipment is five years, we then divide the depreciable base by the useful life to determine the annual depreciation expense.

Thus, the annual depreciation expense is $18,000 (depreciable base) divided by 5 years (useful life), which equals $3,600 per year.