Question

On January 2, 20X5, Lem Corp. bought machinery under a contract that required a down payment of $10,000, plus twenty-four monthly payments of $5,000 each, for total cash payments of $130,000. The cash equivalent price of the machinery was $110,000. The machinery has an estimated useful life of ten years and estimated salvage value of $5,000. Lem uses straight-line depreciation. In its 20X5 income statement, what amount should Lem report as depreciation for this machinery

Answer 1

$10,500 per year

Explanation:

The computation of depreciation under SLM is shown below:-

Depreciation under Straight line method = (cash equivalent price of the machinery - Estimated salvage value) ÷ Useful life

= ($110,000 - $5,000) ÷ 10 years

= $10,500 per year

Therefore for computing the depreciation under straight line method we simply applied the above formula.