Question

A firm is considering purchasing two assets. Asset L will have a useful life of 15 years and cost $4 million; it will have installation costs of $750,000 but no salvage or residual value. asset s will have a useful life of 5 years and cost $2 million; it will have installation costs of $500,000 and a salvage or residual value of $400,000. Which asset will have a greater annual straight - line depreciation?
a. Asset L has $37,500 more in depreciation per year.
b. Asset L has $54,167 more in depreciation per year.
c. Asset S has $37,500 more in depreciation per year
d. Asset S has $103,333 more in depreciation per year.

Answer 1

Answer:

Asset S has $103333 more depreciation expense per year than asset L

Option D is the correct answer.

Explanation:

The straight line depreciation method charges a constant depreciation expense per period throughout the estimated life of the asset. The depreciation expense per year is calculated as follows,

Depreciation expense per period = (Cost - Salvage value) / Estimated useful life of the asset

We first need to calculate the cost of each asset. The cost that is recognized should include all costs incurred to bring the asset to the place and condition of use as intended by the management.

Cost - Asset L = 4000000 + 750000   =  4750000 or 4.75 million

Cost - Asset S = 2000000 + 500000  =  2500000 or 2.5 million

Depreciation expense per year

Asset L = (4750000 - 0) / 15

Asset L = $316,666.67

Asset S = $420000

Difference = 420000 - 316666.67

Difference = $103333.33

Asset S has $103333 more depreciation expense per year than asset L