Question

Ortiz purchased a piece of equipment that cost \(202,000 on January 1, 2017. The equipment has the following components.

Component	Cost	Residual Value	Estimated Useful Life
A	\)70,000	$7,000	10 years
B	50,000	5,000	5 years
C	82,000	4,000	12 years

Compute the depreciation expense for this equipment at December 31, 2017.

Short answer

Answer

Total depreciation expense is $21,800.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Residual Value

An estimated worth of a fixed asset when it is no longer useful or after its lease term has expired, is known as residual value. The definition of residual value varies per industry, but the essential idea remains the same.

Computing depreciation expenses

Component	Calculation	Depreciation Expense
A	$\frac{\$70,000-\$7,000}{10}$	$ 6,300
B	$\frac{\$50,000-\$5,000}{5}$	9,000
C	$\frac{\$82,000-\$4,000}{12}$	6,500
		$21,800

Notes:

The formula used in depreciation expense is as shown below.

$\text{Depreciation}=\frac{\text{Cost\hspace{0.17em}oasset}-Residualvalue}{\text{Useful\hspace{0.17em}life}}$