Caricature's Inc. bought new computers on January 1 for $18,000 to improve the quality of their animation. The computers have a useful life of 8 years but Caricature's Inc. thinks that continuing technology developments will likely mean they will replace the computers after 4 years, at which time they will be worth $2,000. If they use straight-line depreciation, the depreciation expense for the first year will be
A) $2,000.
B) $2,250.
C) $4,000.
D) $4,500.

Question

Quizplus · Accepted Answer

Using straight-line depreciation, we can calculate the annual depreciation expense by taking the difference between the initial cost of the asset and the salvage value (what it will be worth at the end of its useful life), and dividing that by the number of years of useful life.

In this case, the initial cost of the computers is $18,000, and the salvage value is $2,000. The difference between these two is $16,000. Divide that by the 8 years of useful life, and we get an annual depreciation expense of $2,000.

However, the company expects to replace the computers after 4 years instead of using them for their full useful life. So we need to adjust the depreciation expense accordingly. Instead of dividing $16,000 by 8 years, we'll divide it by 4 years, which gives us an annual depreciation expense of $4,000.

Therefore, the depreciation expense for the first year will be $4,000.