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
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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