Question

Gravity Hospital purchased a new item of equipment on January 1,20X1. The equipment has an estimated useful life of ten years and an expected salvage value of 20 percent. Gravity Hospital’s December 31, 20X5, balance sheet reports $10,000 of accumulated depreciation on this equipment. What was the cost of the equipment when it was acquired on January 1, 20X1?

Answer 1

$25000

Explanation:

If the salvage value is 20% of the cost, then 80% of the cost will be depreciated over 10 years. Over the 5 years from Jan 1 20X1 to Dec 31 20X5, the $10,000 accumulated depreciation represents 5/10 of that 80%, or 40% of the initial cost.

$10,000 = 0.40 × cost

$10,000/0.40 = cost = $25,000

The acquisition cost of the equipment was $25,000.