Question

The Chester Company has just purchased $40,900,000 of plant and equipment that has an estimated useful life of 15 years. Suppose at the end of 15 years this plant and equipment can be salvaged for $4,090,000 (1/10th of its original cost). What will be the book value of this purchase (excluding all other Plant and Equipment) after its first year of use? Use generally accepted (FASB) accounting principles.(A) $34,356,000(B) $38,446,000(C) $36,810,000(D) $38,173,333

Answer 1

Answer:

(B) $38,446,000

Explanation:

Assuming a linear depreciation model, depreciation will occur at the same rate each year. Since the total after 15 years is 90% of the original value, the percentage depreciated per year is given by:

$P= \frac{90\%}{15} \\P=6\%$

The book value (V) of this purchase after the first year will be:

$V=\ 40,900,000*(1-0.06)\\V=\ 38,446,000$

Therefore, the answer is (B) $38,446,000