Question

On January 1, 2005, Jambon purchased equipment for use in developing a new product. Jambon uses the straight-line depreciation method. The equipment could provide benefits over a 10-year period.

However, the new product development is expected to take 5 years, and the equipment can be used only for this project.

Jambon's 2005 expense equals

A. The total cost of the equipment.
B. One-fifth of the cost of the equipment.
C. One-tenth of the cost of the equipment.
D. Zero.

Answer 1

A. The total cost of the equipment.

Step-by-step explanation:

Even if Jambon has not used the equipment in 2005 because it can only be used for the product that is to be developed in five years, Jambon still had to pay for the full cost of the equipment.

Because the equipment is laying idle, it is not depreciating. Therefore, the expense that Jambon is not incurring, is the depreciation expense associated with this equipment. This depreciation expense will only be seen in five years, when the product it was bought for is finally completed.