Question

A building with a cost of $1,800,000 has an estimated residual value of $125,000, has an estimated useful life of 40 years, and is depreciated by the straight-line method. a. What is the amount of the annual depreciation?

Answer 1

$41,875

Extra

a. $17,250 [($780,000 – $90,000) ÷ 40]

b. $366,000 [$780,000 – ($17,250 × 24 yrs.)]

c. $29,600 [($366,000 – $70,000) ÷ 10 yrs.]

Explanation:

Step 1: Determine the cost of the asset

`1,800,000`

Step 2: Subtract the estimated salvage value of the asset from the cost of the asset to get the total depreciable amount

`1,800,000 - 125,000`

Step 3: Determine the useful life of the asset

`40`

Step 4: Divide the sum of step (2) by the number arrived at in step (3) to get the annual depreciation amount

`$41,875`