Question

On April 1, 2016, Cyclone’s Backhoe Co. purchases a trencher for \(280,000. The machine is expected to last five years and have a salvage value of \)40,000. Compute depreciation expense for both 2016 and 2017 assuming the company uses the straight-line method.

Short answer

The depreciation expense in 2016 is $36,000 and the depreciation expense in 2017 is $48,000.

Step-by-step solution

Partial-Year Depreciation

When an asset is purchased (or sold) at a time other than the beginning or the end of an accounting period, the depreciation is recorded for a part of a year.

Computation of depreciation

$\mathbf{Depreciation}\mathbf{=}\frac{\mathbf{cost}\mathbf{-}\mathbf{salvage}\mathbf{}\mathbf{value}}{\mathbf{useful}\mathbf{}\mathbf{ }\mathbf{life}}\mathbf{\times }\mathbf{time}\mathbf{ }\mathbf{period}\mathbf{.}$

Computation of depreciation

Depreciation in 2016 (from April to December):

$\begin{array}{rcl}\mathrm{Depreciation}& =& \frac{\$280,000-\$40,000}{5\mathrm{years}}\times \left(\frac{9}{12}\right)\\ & =& \frac{\$240,000}{5\mathrm{years}}\times \left(\frac{3}{4}\right)\\ & =& \$36,000.\end{array}$

Depreciation in 2017 (for 1year):

$\begin{array}{rcl}\mathrm{Depreciation}& =& \frac{\$280,000-\$40,000}{5\mathrm{years}}\\ & =& \frac{\$240,000}{5\mathrm{years}}\\ & =& \$48,000.\end{array}$