Question

A company purchases equipment for $30,000 on July 1, 2019. It estimates that the equipment will have a salvage value of $2,000 and its useful life will be 7 years. Assuming that the company's accounting year ends on December 31 of each year, what will be the Depreciation Expense for the years 2019 and 2020 assuming straight-line depreciation?

A) Year 2019: $4,000
B) Year 2019: $4,571
C) Year 2019: $4,285
D) Year 2019: $4,857

Answer 1

For the year 2019, since the equipment was purchased mid-year, the depreciation expense is half of the annual depreciation, which is $2,000. For the full year 2020, the depreciation expense is $4,000 based on the straight-line depreciation method.

Step-by-step explanation:

The company purchased equipment for $30,000 on July 1, 2019, which has a salvage value of $2,000 and a useful life of 7 years. To calculate the annual depreciation using straight-line depreciation, we subtract the salvage value from the purchase price and then divide by the number of years of useful life.

Annual Depreciation = (Cost - Salvage Value) / Useful Life = ($30,000 - $2,000) / 7 = $28,000 / 7 = $4,000 per year.

However, since the equipment was purchased in the middle of the year, only half of the year's depreciation should be accounted for in 2019, which would be $4,000 / 2 = $2,000 for the year 2019.

For the full subsequent year 2020, the full annual depreciation of $4,000 would apply. Therefore, the correct answer is B) Year 2019: $2,000.