Question

NewTech purchases computer equipment for $154,000 to use in operating activities for the next four years. It estimates the equipment’s salvage value at $25,000.

Prepare a table showing depreciation and book value for each of the four years assuming straight-line depreciation.
  

Answer 1

Solution

NewTech

Computation of depreciation expense and book value for each of the four years assuming straight line depreciation:

Year	Depreciation Expense	Accumulated Depreciation	Book Value
Year 1	$32,250	$32,250	$121,750
Year 2	$32,250	$64,500	$89,500
Year 3	$32,250	$96,750	$57,250
Year 4	$32,250	$129,000	$25,000

Computations:

Depreciation expense = depreciable base x 1/useful life

Depreciable base = cost – salvage value

Cost = $154,000

Salvage value = $25,000

Depreciable base = 154,000 – 25,000 = $129,000

Useful life = 4 years

Depreciation expense = 129,000/4 = $32,250

The annual depreciation expense under straight line method would be constant throughout the useful life of the asset. Hence, annual depreciation expense for each of the four years is $32,250.

Year 1

Depreciation expense = $32,250

Accumulated depreciation = $32,250

Book value = cost – accumulated depreciation

= 154,000 – 32,250 = $121,750

Year 2

Depreciation expense = $32,250

Accumulated depreciation = $32,250 + 32,250 = 64,500

Book value = cost – accumulated depreciation

= 154,000 –64,500 = $89,500

Year 3

Depreciation expense = $32,250

Accumulated depreciation = 64,500 + 32,250 = 96,750

Book value = cost – accumulated depreciation

= 154,000 – 96,750 = $57,250

Year 4

Depreciation expense = $32,250

Accumulated depreciation = 96,750 + 32,250 = $129,000

Book value = cost – accumulated depreciation

= 154,000 – 129,000 = $25,000