Question

Nelson Company purchase equipment on July 1 for $27,500 and decided to depreciate the equipment on the straight-line method over its useful life of five years. Assuming the equipment's residual value is $3,500, the amount of monthly depreciation expense Nelson should recognize is:

A. $2,400
B. $200
C. $4,800
D. $400
E. $450

Answer 1

The monthly depreciation expense that Nelson Company should recognize using the straight-line method for the equipment is $400. This is calculated by subtracting the residual value from the cost of the equipment, dividing by the useful life, then dividing the annual depreciation by 12.

Step-by-step explanation:

The student is tasked with calculating the monthly depreciation expense for equipment purchased by Nelson Company using the straight-line depreciation method. The equipment was bought for $27,500 with a residual value of $3,500 and a useful life of five years. The straight-line depreciation method allocates an even amount of depreciation each year over the useful life of an asset.

First, to find the total depreciatable amount, we subtract the residual value from the initial cost:

$27,500 (initial cost) - $3,500 (residual value) = $24,000 (total depreciation over life).

Next, we divide this by the useful life in years to get the annual depreciation:

$24,000 / 5 years = $4,800 (annual depreciation).

Finally, to get the monthly depreciation, we divide the annual depreciation by 12 months:

$4,800 / 12 months = $400 (monthly depreciation expense).