Question

Equipment with a cost of $130,000 has an estimated residual value of $10,000 and an estimated life of 5 years was purchased on October 1st of this year. It is to be depreciated by the straight-line method. What is the amount of depreciation for the first year? $24,000 $6,000 $90,000 $25,000

Answer 1

Answer = $6,000

Here the equipment is purchased with a cost of $130,000 on 1 October.

Estimated Residual Value is $10,000, Estimated useful life is 5 years.

Assumption: It is assumed that the books of accounts are closed on 31 December.

Depreciation under Straight line method = (Cost of the asset -  Estimated Residual Value) / Estimated useful life

= ($130,000 - $10,000) / 5

= $120,000 / 5

= $24,000

Here the equipment is purchased on 1 October, which means it is used for only 3 months in the first year.

So, Depreciation under Straight line method for the equipment will be proportioned for 3 months.

Amount of Depreciation in the first year = $24,000 * 3/12

= $24,000 * 1/4

= $6,000

Amount of Depreciation in the first year = $6,000