Question

On April 1, 2006, Company A purchased an equipment at a cost of ?140,000. This equipment is estimated to have 5 year useful life. At the end of the 5th year, the residual value will be ?20,000. Company A recognizes depreciation to the nearest whole month. Calculate the depreciation expenses for 2006, 2007 and 2008 using straight line method

Answer 1

Purchase cost = $140000

Residual value after the useful life = $20000

So, net amount for depreciation = 140000-20000 = $120000

Useful life = 5 years

So, annual depreciation for one year as per straight line method (SLM) = 120000/5 = $24000

Since asset is purchased at April1, 2006, then there is only 9 month use in the 2006.

SLM depreciation expense for year 2006 = 24000*(9/12) = $18000

SLM depreciation expense for year 2007 = $24000

SLM depreciation expense for year 2008 = $24000