Jim Company bought a machine for $36,000with an estimated lofe of 5 years. The residual value of the machine is $6,000 Calculate (a) the annual depreciation and (b) the book value at the end of year 3. Assume straight-line depreciation
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To calculate the annual depreciation, we can use the straight-line depreciation method. This method assumes that the asset depreciates evenly over its useful life.
(a) The annual depreciation is calculated by subtracting the residual value from the initial cost of the machine and dividing it by the estimated life of the machine.
Initial cost of the machine = $36,000
Residual value of the machine = $6,000
Estimated life of the machine = 5 years
Annual depreciation = (Initial cost - Residual value) / Estimated life
= ($36,000 - $6,000) / 5
= $30,000 / 5
= $6,000
Therefore, the annual depreciation is $6,000.
(b) To find the book value at the end of year 3, we need to calculate the accumulated depreciation first. Accumulated depreciation is the total depreciation that has been recorded until a specific point in time.
Accumulated depreciation = Annual depreciation * Number of years
= $6,000 * 3
= $18,000
Book value at the end of year 3 = Initial cost - Accumulated depreciation
= $36,000 - $18,000
= $18,000
Therefore, the book value at the end of year 3 is $18,000.