Question

On January 1, 2018, Pritchett Corporation purchased equipment for $50,000. The equipment had a five-year life with a $10,000 residual value. Pritchett uses the straight-line depreciation method. What is the book value of the equipment on January 1, 2021?

a. $34,000
b. $26,000
c. $20,000
d. $30,000

Answer 1

The book value of the equipment on January 1, 2021, is $26,000.

Step-by-step explanation:

To find the book value of the equipment on January 1, 2021, we need to determine the accumulated depreciation. The equipment has a five-year life, so each year it depreciates by an equal amount. The annual depreciation expense can be calculated by subtracting the residual value ($10,000) from the initial cost ($50,000) and dividing by the useful life (5 years). Therefore, the annual depreciation expense is ($50,000 - $10,000) / 5 = $8,000.

To calculate the accumulated depreciation, we multiply the annual depreciation expense by the number of years since the equipment was purchased. On January 1, 2021, three years will have passed since the purchase. So, the accumulated depreciation is $8,000/year * 3 years = $24,000.

The book value of the equipment is the initial cost minus the accumulated depreciation. Therefore, the book value on January 1, 2021, is $50,000 - $24,000 = $26,000.