Question

Using straight-line depreciation, what is the book value after four years for an asset costing 170,000 that has a salvage value of 21,000 after 10 years? What is the depreciation charge in the fifth year (Use 5 significant figures for your calculations and round your answer to the nearest dollar)?

a. Book value after four years?

b. Depreciation charge in the fifth year?

Answer 1

Some important terms to understand

Straight line depreciation

It is the most common method of depreciation. It is used to calculate how much amount will be lost as depreciation at the end of the asset's useful life. The difference of amount between the purchase value of an asset and the salvage value divided by the estimated useful life of that particular asset is straight line depreciation method.

Formula

(Cost of asset - salvage value)/useful life of an asset

Salvage value

Salvage value is the an estimated value of an asset at the end of its useful life.

Information Given in the Question

Cost of an asset = $1,70,000

Salvage value = $ 21,000

Useful life of an asset = 10 years

a. Book value after four years? (using straight line method)

Depreciable cost = Cost of the asset - Salvage value

= $170000-$21000

= $149000

The depriciable cost of the asset is $1,49,000

Annual depriciation = Depreciable cost/useful life of the asset

= $149000/10 years

= $14900

So, $14,900 is the amount of annual depriciation from the value of the asset each year (according to straight line method).

Book value for each year = cost of an asset - annual depreciation value

Therefore the book value for ten years of depreciation would be :-

YEAR	ANNUAL DEPRECIATION	VALUE OF THE ASSET
0	-	170000 (cost of asset)
1	14900	155100
2	14900	140200
3	14900	125300
4	14900	110400
5	14900	95500
6	14900	80600
7	14900	65700
8	14900	50800
9	14900	35900
10	14900	21000 (salvage value)

The book value of the asset after four years is $1,10,400.

b. Depreciation charge in the fifth year?

The depriciable cost of the asset is $1,49,000

Depreciable amount of the asset per year = $14900

Depriciation charge = 1/useful life of the asset

= 1/10

= 0.1 (10%)

5th year book value will be = $95500 (refer table)