Question

A company purchased factory equipment on April 1, 2019 for $160,000. It is estimated that the equipment will have a $20,000 salvage value at the end of its 10-year useful life. Using the straight-line method of depreciation, the amount to be recorded as depreciation expense at December 31, 2019 is:________.a. $16,000.

b. $14,000.
c. $10,500.
d. $12,000.

Answer 1

The correct answer:

$14,000 (b.)

Step-by-step explanation:

Depreciation is an accounting method of allocation of cost to a tangible asset, where the recorded cost of a fixed asset is reduced in a systemic manner, until the value of the asset becomes zero is negligible.

In the straight-line basis of calculating depreciation, the difference between the cost of an asset and its expected salvage value is divided by the number of years it is expected to be used.

Mathematically, it is calculated as:

Depreciation of an asset = (purchase price - salvage value) ÷ estimated useful life.

Purchase price = $160,000

salvage value = $20,000

useful life = 10 years

∴ Depreciation = (160,000 - 20,000) ÷ 10

= 140,000 ÷ 10 = $14,000.

This means that at the end of every year, the value of the equipment reduces by a price worth $14,000.