Question

MacKenzie Manufacturing purchased equipment for $160,000. In addition, shipping charges of $2,000 were incurred to obtain the equipment. The company paid $12,500 to construct a foundation and install the equipment. The equipment is estimated to have a residual value of $15,000 at the end of its 5-year useful life. Required: Using the straight-line method, what is the net book value of the equipment at the end of the third full year of use

Answer 1

$78,800

Step-by-step explanation:

For computing the net book value at the end of the third year first, we have to determine the depreciation expense that is

So, under the straight-line method, the depreciation expense would be

= (Original cost of equipment - residual value) ÷ (useful life)

= ($174,500 - $15,000) ÷ (5 years)

= ($159,500) ÷ (5 years)

= $31,900

The purchase cost is

= $160,000 + $2,000 + $12,500

= $174,500

For three years, the depreciation would be

= $31,900 × 3 years

= $95,700

In this method, the depreciation is same for all the remaining useful life

Now the book value would be

= Acquired value of an asset - accumulated depreciation

= $174,500 - $95,700

= $78,800