Question

Bart paid $150,000 for a piece of equipment for his business. Bart's income statement puts the straight line depreciation rate at 20%, and the equipment is expected to have a residual value of $1,000 at the end of its useful life, which is expected to be five years.

Answer 1

Bart's annual depreciation on the equipment is calculated to be $29,800 per year using the straight-line depreciation method, with a depreciation rate of 20%. This is based on a $150,000 cost, $1,000 residual value, and five-year useful life.

Step-by-step explanation:

Bart purchased equipment for his business at a cost of $150,000. To calculate the annual depreciation expense using the straight-line method, you subtract the residual value from the cost and then divide by the useful life. In this case, the residual value is $1,000, and the expected useful life of the equipment is five years. So, the straight-line depreciation each year would be: (Cost - Residual Value) / Useful Life. Therefore, the annual depreciation would be ($150,000 - $1,000) / 5 years = $29,800.

The depreciation rate is 20%, meaning that the business will allocate 20% of the equipment's depreciable cost to expense each year. This is a common financial metric used when assessing the payback period for an investment, which is the duration needed for an investment's earnings to cover its cost.