What is the depreciation, for the year of acquisition and for the following year of a fixed asset acquired on October 1 for $500,000, with an estimated life of 5 years, and residual value of $50,000, using the straight-line method. Assume a fiscal year ending December 31.
A) Yr. of acquisition: $50,000; following year: $90,000
B) Yr. of acquisition: $22,500; following year: $90,000
C) Yr. of acquisition: $90,000; following year: $90,000
D) Yr. of acquisition: $22,500; following year: $180,000

Question

Quizplus · Accepted Answer

To calculate the annual depreciation using the straight line method, we use the following formula:

Annual Depreciation = (Cost of asset – Residual value) / Estimated useful life

For this question, the cost of the asset is $500,000 and residual value is $50,000, so the depreciable amount is $450,000. The estimated life of the asset is 5 years, so the annual depreciation would be:

Annual Depreciation = ($450,000 / 5) = $90,000

However, since the asset was acquired on October 1, we need to calculate the depreciation only for the remaining period of the fiscal year, which is 3 months or 0.25 years. Thus, the depreciation for the year of acquisition would be:

Depreciation for Yr. of acquisition = $90,000 x 0.25 = $22,500

For the following year, the full annual depreciation of $90,000 would apply. Therefore, the depreciation for the following year would be:

Depreciation for following year = $90,000

Hence, the correct answer is B.

What Is the Depreciation, for the Year of Acquisition and for the Following