FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN: 9781259964947
Author: Libby
Publisher: MCG
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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.
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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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