Big Steel Co. has the following accounts: Current assets $10,000 Property, plant & equipment $240,000 Less: accumulated depreciation 100,000 140,000 Total assets $150,000 Gross profit $95,000 Depreciation expense $25,000 Tax expense $10,000 Net income $55,000 The average age of fixed asset is estimated to be: a. 4 years b. 2 years c. 3 years d. 1 year

4.8 years (which is approximately 5 years.)

Explanation:

Depreciation is the systematic allocation of cost of an asset to the income statement considering the estimated useful life of the asset.

The residual value is the estimated amount that will be received on the disposal of the asset after its useful life. Where not given, it may be taken to be zero.

Mathematically,

Depreciation = (cost - residual value) / estimated useful life

Let the estimated useful life be T

25,000 = 240,000/T

T = 240,000/25,000

= 4.8 years

A) 4 years

Explanation:

The average age of an asset can usually be calculated by dividing the accumulated depreciation account by the current depreciation expense. You have to be careful with this method because sometimes you have different types of assets which have different depreciation timelines. You must calculate each accumulated depreciation and depreciation expenses separately.

But in this case, we only have one type of fixed asset, so its average age = $100,000 / $25,000 = 4 years