Question

George bought a piece of equipment for $30,000. The equipment has a useful life of 4...

George bought a piece of equipment for $30,000. The equipment has a useful life of 4 years and a salvage value of $2,000 at the end of its useful life. Assume that the annual interest is 9%.

1. Calculate the book value at the end of year 2, using the straight line depreciation method.

a. $18,000

b. $16,000

c. $14,000

d. $12,000

2. Calculate the present value of depreciation, using the straight line depreciation method.

a. $20,756

b. $21,383

c. $22,480

d. $23,240

3. Calculate the book value at the end of year 3, using the DDB depreciation method.

a. $2,800

b. $3,250

c. $3,750

d. $4,100

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Answer #1

Question 1

Calculate Depreciation -

Depreciation = [Value of equipment - Salvage value]/Useful life

Depreciation = [30,000 - 2,000]/4 = 7,000

In case of straight line depreciation method, amount of depreciation remains same in each year.

Calculate the book value at the end of Year 2 -

Book value = Cost of equipment - Accumulated depreciation

Book value = 30,000 - (2*7,000) = 30,000 - 14,000 = $16,000

The book value at the end of Year 2 is $16,000.

Hence, the correct answer is the option (b).

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