Question

An oil company is buying a semi-submersible oil rig for $15 million. Additionally, it will cost $1.5 million to move the oil rig to the oil-field and to prepare it for operations. If it is depreciated over six years using straight-line depreciation, what are the yearly depreciation expenses in this case? O A. $2.5 million OB. $2.8 million OC. $3.0 million OD. $2.3 million

Answer 1

Ans : Option A , $ 2.5 million

Depreciation under SLM method:

Depreciation expense = (C-S) / L

C = Cost of the asset = $ 15 million

S = Salvage value = 0

L = Life of the asset = 6

Substitute all the above data in the formula.

Depreciation expense = (C-S) / L

Annual Depreciation expense = ($ 15 - 0 ) / 6

= $ 15 million / 6

= $ 2.5 million

Cost to move from oil field and to prepare to operate does not form part of cost of the asset.