Solve using Straight Line Depreciation: Initial cost for buying and installing the machine in manufacturing system is $ 16000 and useful life of that is 4 years. After 4 years the salvage value of the machine is $ 4000. Find book value and depreciation value?
Solve using Straight Line Depreciation: Initial cost for buying and installing the machine in manufacturing system is $ 16000 and useful life of that is 4 years. After 4 years the salvage value of the machine is $ 4000. Find book value and depreciation value?
Chapter1: Financial Statements And Business Decisions
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Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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![**Straight Line Depreciation Example**
Solve using Straight Line Depreciation:
- **Initial Cost**: The cost for buying and installing the machine in the manufacturing system is $16,000.
- **Useful Life**: 4 years.
- **Salvage Value**: After 4 years, the salvage value of the machine is $4,000.
**Objective**: Find the book value and depreciation value.
### Explanation:
Straight line depreciation involves subtracting the salvage value from the initial cost, then dividing by the useful life to find the annual depreciation.
\[
\text{Annual Depreciation} = \frac{\text{Initial Cost} - \text{Salvage Value}}{\text{Useful Life}}
\]
- **Annual Depreciation**: \(\frac{16,000 - 4,000}{4} = 3,000\)
Each year, the machine will depreciate by $3,000.
### Book Value Calculation:
- **End of Year 1**: Initial Cost - (1 × Annual Depreciation) = $16,000 - $3,000 = $13,000
- **End of Year 2**: Initial Cost - (2 × Annual Depreciation) = $16,000 - $6,000 = $10,000
- **End of Year 3**: Initial Cost - (3 × Annual Depreciation) = $16,000 - $9,000 = $7,000
- **End of Year 4**: Initial Cost - (4 × Annual Depreciation) = $16,000 - $12,000 = $4,000
**Key Points**:
- The **book value** of an asset is its original cost minus accumulated depreciation.
- At the end of its useful life, the book value equals the salvage value.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Ff80ba54f-18b4-4d71-8959-517d0920bb4d%2Ffd547b4f-2116-40c8-ab09-5f5e9226a912%2F82aoexc_processed.png&w=3840&q=75)
Transcribed Image Text:**Straight Line Depreciation Example**
Solve using Straight Line Depreciation:
- **Initial Cost**: The cost for buying and installing the machine in the manufacturing system is $16,000.
- **Useful Life**: 4 years.
- **Salvage Value**: After 4 years, the salvage value of the machine is $4,000.
**Objective**: Find the book value and depreciation value.
### Explanation:
Straight line depreciation involves subtracting the salvage value from the initial cost, then dividing by the useful life to find the annual depreciation.
\[
\text{Annual Depreciation} = \frac{\text{Initial Cost} - \text{Salvage Value}}{\text{Useful Life}}
\]
- **Annual Depreciation**: \(\frac{16,000 - 4,000}{4} = 3,000\)
Each year, the machine will depreciate by $3,000.
### Book Value Calculation:
- **End of Year 1**: Initial Cost - (1 × Annual Depreciation) = $16,000 - $3,000 = $13,000
- **End of Year 2**: Initial Cost - (2 × Annual Depreciation) = $16,000 - $6,000 = $10,000
- **End of Year 3**: Initial Cost - (3 × Annual Depreciation) = $16,000 - $9,000 = $7,000
- **End of Year 4**: Initial Cost - (4 × Annual Depreciation) = $16,000 - $12,000 = $4,000
**Key Points**:
- The **book value** of an asset is its original cost minus accumulated depreciation.
- At the end of its useful life, the book value equals the salvage value.
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