At the beginning of 2020, Earth Co purchased a machine at a cost of $40,000. Earth Co expects the machine to remain useful for eight years (5,000 machine hours) and to have a residual value of $5,000. Earth Co expects the machine to be used 1,200 hours the first year. Using straight-line depreciation compute the depreciation expense and determine net book value. Depreciation Expense $4,375, net book value $35,625 Depreciation Expense $8,400, net book value $31,600 Depreciation Expense $10,000, net book value $30,000 Depreciation Expense $0, net book value $40,000

Question

Business

Roselyn Meza

30 December, 09:51

At the beginning of 2020, Earth Co purchased a machine at a cost of $40,000. Earth Co expects the machine to remain useful for eight years (5,000 machine hours) and to have a residual value of $5,000. Earth Co expects the machine to be used 1,200 hours the first year. Using straight-line depreciation compute the depreciation expense and determine net book value. Depreciation Expense $4,375, net book value $35,625 Depreciation Expense $8,400, net book value $31,600 Depreciation Expense $10,000, net book value $30,000 Depreciation Expense $0, net book value $40,000

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Answers (1)

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Mia Ochoa · Answer 1

Option B Depreciation Expense $8,400, net book value $31,600

Explanation:

The depreciation can be calculated using the following formula:

Depreciation For Y1 = (Cost - Residual Value) * Hours consumed / T. Hours

Here

Cost is $40,000

Residual Value is $5,000

Hours consumed are 1,200 hours

Total Hours are 5,000 hours

Now by putting values, we have:

Depreciation For Y1 = ($40,000 - $5,000) * 1200 / 5000

Depreciation For Y1 = $8,400

Now Net Book Value can be calculated using the following formula:

Net Book Value = Cost - Accumulated Depreciation

Net Book Value = $40,000 - $8400 = $31,600

Hence the right answer is option B.