Question

Magnotti Floors purchased a floor sander for $3,550. Delivery costs totaled $225. The salvage value is $755 after 8 years. Using the straight-line depreciation method, calculate the book value at the end of year 5.

a) $1,662.50

b) $1,887.50

c) $2,412.50

d) $935.50

Answer 1

As per Generally Accepted Accounting Principles, all costs associated to bring an asset to its present location and condition are added with the cost of the asset to recognize it in the balance sheet

So, delivery costs of $225 will be added to the purchase cost in order to arrive at cost of the asset

So, Cost of the asset

= Purchase cost + Delivery charges

= $3,550 + $225

= $3,775

Depreciable amount

= Cost of the asset – Salvage value

= $3,775 - $755

= $3,020

Useful life = 8 Years

So, Depreciation per year under straight line method

= Depreciable Amount / Useful life

= $3,020 / 8

= $ 377.5 per year

Accumulated Depreciation at the end of 5 years

= Depreciation per year x Number of years

= $ 377.5 x 5

= $ 1,887.5

So, Book value at the end of year 5

= Cost of the asset – Accumulated Depreciation at the end of year 5

= $3,775 - $1,887.5

= $ 1,887.5

So, as per above calculations, option b is the correct option