A truck was purchased for $25,000. It has a six-year life and a $4,000 salvage value. Using straight-line depreciation, what is the asset’s carrying value (book value) after 2 years?
To find the asset's carrying value (book value) after 2 years using straight-line depreciation, you need to understand the concept of straight-line depreciation and how it is calculated.
Straight-line depreciation is a method used to allocate the cost of an asset evenly over its useful life. The formula for calculating straight-line depreciation is:
Depreciation Expense = (Cost - Salvage Value) / Useful Life
In this case, the cost of the truck is $25,000, the salvage value is $4,000, and the useful life is 6 years.
To calculate the annual depreciation expense, you would use the formula above:
Depreciation Expense = ($25,000 - $4,000) / 6
Depreciation Expense = $21,000 / 6
Depreciation Expense = $3,500 per year
After calculating the annual depreciation expense, you can determine the asset's carrying value after 2 years by subtracting the accumulated depreciation from the initial cost.
Accumulated Depreciation = Depreciation Expense * Number of Years
Accumulated Depreciation = $3,500 * 2
Accumulated Depreciation = $7,000
Carrying Value = Cost - Accumulated Depreciation
Carrying Value = $25,000 - $7,000
Carrying Value = $18,000
Therefore, the asset's carrying value (book value) after 2 years is $18,000.