Question

A company uses straight line depreciation for an item of equipment that cost $12000, had a salvage value of $2,000 and a five year useful life. After depreciating the asset for three complete years, the salvage value was reduced to $1200 but its total useful life remained the same. Determine the amount of depreciation to be charged against the equipment during each of the remaining years of its useful life.a. 1000b. 1800c. 5400d. 2400e. 2000

Answer 1

Answer:

option (d) 2400

Explanation:

Data provided in the question:

Initial book value = $12,000

Salvage value = $2000

Useful life = 5 years

Thus,

Using the straight line method of depreciation

Annual depreciation = [Cost - Salvage value] ÷ Useful life

= [ $12,000 - $2,000 ] ÷ 5

= $2,000

Accumulated Depreciation for 3 years

= Annual depreciation × Time

= $2,000 × 3

= $6,000

Book value after 3 years = Cost - Accumulated depreciation

= $12,000 - $6,000

= $6,000

Remaining useful life = 2 years

Reduced Salvage value after 3 years = $1,200

Therefore,

Depreciable value of the Asset = Book value - Reduced salvage value

= $6,000 - $1,200

= $4,800

Revised depreciation to be charged every year

= Depreciable value of the Asset ÷ (Remaining useful life)

= $4,800 ÷ 2

= $2,400

Hence,

The correct answer is option (d) 2400