Question

On January 2, 2016 McNally's Extra Corporation acquired equipment for $120,000. The estimated life of the equipment is 5 years or 20,000 hours. The estimated residual value is $20,000. If McNally's Extra Corporation uses the straight-line method of depreciation, What will be the debit to Depreciation Expense for the year ended December 31, 2017, during which period the asset was used 4,500 hours?

a) $27,000
b) $24,000
c) $22,500
d) $20,000

Answer 1

Using the straight-line method of depreciation, the annual depreciation expense for McNally's Extra Corporation's equipment is $20,000, and this amount remains constant each year regardless of hours used.

Step-by-step explanation:

The student's question involves calculating the depreciation expense of an asset using the straight-line method of depreciation for McNally's Extra Corporation. To calculate the annual depreciation expense, we first subtract the estimated residual value from the cost of the equipment and then divide by the useful life of the asset.

Here's the formula:

Annual Depreciation Expense = (Cost of Equipment - Residual Value) / Useful Life

Using the figures provided:

Annual Depreciation Expense = ($120,000 - $20,000) / 5 years

Annual Depreciation Expense = $100,000 / 5 years = $20,000 per year

The annual depreciation expense remains constant each year with the straight-line method, regardless of how many hours the equipment was used. Therefore, the debit to Depreciation Expense for the year ended December 31, 2017, would be $20,000.