An asset being depreciated with the straight-line method has a residual value of $10,000 and accumulated depreciation expense of $30,000 in its second year. What was the original cost of the asset if its useful life was 5 years?
A) $160,000
B) $140,000
C) $ 85,000
D) $75,000

Question

Quizplus · Accepted Answer

Using the straight-line method, the depreciation expense per year would be:

(Depreciable cost - Residual value) / Useful life

We can rearrange this equation to solve for the depreciable cost:

Depreciable cost = (Depreciation expense per year) x Useful life + Residual value

In this case, we are given that the asset has a residual value of $10,000 and has accumulated depreciation expense of $30,000 in its second year. This means that the annual depreciation expense is:

Depreciation expense per year = (Original cost - Residual value) / Useful life

$30,000 (accumulated depreciation) = $10,000 (residual value) + Depreciation expense per year x 2 (years)

Depreciation expense per year = ($30,000 - $10,000) / 2 = $10,000 per year

Using this information, we can solve for the original cost:

Depreciable cost = $10,000 per year x 5 years + $10,000 (residual value) = $60,000

Therefore, the original cost of the asset was $60,000. The only answer choice that is close to this amount is C ($85,000).

An Asset Being Depreciated with the Straight-Line Method Has a Residual