Question

The "Big-Deal" Company has purchased new furniture for their offices at a retail price of $125,000 An additiona! $20,000 has been charged for insurance, shipping, and handling. The company expects to use the furniture for 10 years (useful life 10 years) and then sell it at a salvage (market) value of $15,000. Use the SL method of depreciation to answer these questions. (7.3)

a. What is the depreciation during the second year?
b. What is the BV of the asset at the end of the first year?
c. What is the BV of the asset after 10 years?

Answer 1

Using the straight-line method, the depreciation during the second year is $13,000, the book value of the asset at the end of the first year is $132,000, and after 10 years the book value is equal to the salvage value, which is $15,000.

Step-by-step explanation:

The subject of this question is Business, particularly focusing on the area of accounting and the concept of depreciation. The student has been asked about the straight-line (SL) method of depreciation regarding office furniture purchased by the "Big-Deal" company.

Steps to Calculate SL Depreciation

1. Calculate the depreciable base by subtracting the salvage value from the cost of the asset.
2. Divide the depreciable base by the useful life of the asset to find the annual depreciation expense.
3. To find the depreciation for the second year, simply use the annual depreciation expense calculated.
4. The book value (BV) at the end of any year can be calculated by subtracting the accumulated depreciation until that year from the initial cost of the asset.
5. After the useful life of the asset (10 years), the BV should be equal to the salvage value.

For the "Big-Deal" company:

• The cost of the furniture is $125,000.
• The additional cost for insurance, shipping, and handling is $20,000, making the total cost $145,000.
• The salvage value at the end of 10 years is $15,000.
• Thus, the depreciable base is $145,000 - $15,000 = $130,000.
• The annual depreciation is $130,000 / 10 years = $13,000 per year.
• Therefore, the depreciation during the second year is also $13,000.
• The BV of the asset at the end of the first year is $145,000 - $13,000 = $132,000.
• After 10 years, all the depreciation would have been charged, so the BV should be equal to the salvage value of $15,000.

Answers to the Student's Questions

• a. The depreciation during the second year is $13,000.
• b. The BV of the asset at the end of the first year is $132,000.
• c. The BV of the asset after 10 years is the salvage value, which is $15,000.