Assume you lease a $45,000 BMW. Using a straight- line method with a 3- year ueful life and is a $16, 675 residual value, what is the book value of the BMW after the first year?
To calculate the book value of the BMW after the first year using the straight-line method, you would need to understand the concept of depreciation and how it is calculated.
Depreciation is the reduction in value of an asset over time due to wear and tear, age, or obsolescence. The straight-line method is one way to calculate depreciation and is commonly used for accounting purposes. It evenly distributes the depreciation expense over the useful life of the asset.
To calculate the annual depreciation expense, you would subtract the residual value from the initial cost and divide it by the useful life. In this case, the initial cost of the BMW is $45,000, the residual value is $16,675, and the useful life is 3 years.
Annual Depreciation Expense = (Initial Cost - Residual Value) / Useful Life
Annual Depreciation Expense = ($45,000 - $16,675) / 3
Annual Depreciation Expense = $28,325 / 3
Annual Depreciation Expense = $9,441.67
After the first year, the BMW would have depreciated by the annual depreciation expense. Therefore, the book value after the first year would be the initial cost minus the depreciation expense.
Book Value After the First Year = Initial Cost - Annual Depreciation Expense
Book Value After the First Year = $45,000 - $9,441.67
Book Value After the First Year = $35,558.33
So, the book value of the BMW after the first year would be approximately $35,558.33.