Calculate the total cost, total depreciation, and annual depreciation (in $) for the following assets by using the straight-line method. (Round your answers to the nearest cent.)
| Cost | Shipping Charges | Setup Charges | Total Cost | Salvage Value | Estimated Useful Life (Years) | Total Depreciation | Annual Depreciation |
| :---------- | :--------------- | :------------ | :--------- | :------------ | :---------------------------- | :----------------- | :------------------ |
| $88,700 | $625 | $2,500 | | $7,000 | 7 | | |
Answer (2)
Calculate the total cost by adding the cost, shipping charges, and setup charges: T o t a l C os t = $88 , 700 + $625 + $2 , 500 = $91 , 825 .
Determine the total depreciation by subtracting the salvage value from the total cost: T o t a l De p rec ia t i o n = $91 , 825 − $7 , 000 = $84 , 825 .
Compute the annual depreciation by dividing the total depreciation by the estimated useful life: A nn u a l De p rec ia t i o n = 7 $84 , 825 = $12 , 117.86 .
The total cost is $91 , 825 , the total depreciation is $84 , 825 , and the annual depreciation is $12 , 117.86 .
Explanation
Calculate Total Cost First, we need to calculate the total cost of the asset. This is the sum of the initial cost, shipping charges, and setup charges.
Sum the costs The cost of the asset is $88,700, the shipping charges are $625, and the setup charges are $2,500. Therefore, the total cost is: T o t a l C os t = C os t + S hi pp in g C ha r g es + S e t u p C ha r g es T o t a l C os t = $88 , 700 + $625 + $2 , 500 = $91 , 825
Calculate Total Depreciation Next, we calculate the total depreciation. This is the difference between the total cost and the salvage value.
Subtract Salvage Value from Total Cost The total cost is $91,825 and the salvage value is $7,000. Therefore, the total depreciation is: T o t a l De p rec ia t i o n = T o t a l C os t − S a l v a g e Va l u e T o t a l De p rec ia t i o n = $91 , 825 − $7 , 000 = $84 , 825
Calculate Annual Depreciation Finally, we calculate the annual depreciation. This is the total depreciation divided by the estimated useful life of the asset.
Divide Total Depreciation by Useful Life The total depreciation is $84,825 and the estimated useful life is 7 years. Therefore, the annual depreciation is: A nn u a l De p rec ia t i o n = E s t ima t e d U se f u l L i f e T o t a l De p rec ia t i o n A nn u a l De p rec ia t i o n = 7 $84 , 825 = $12 , 117.857142857143 Rounding to the nearest cent, the annual depreciation is $12,117.86.
State the Results Therefore, the total cost is $91,825, the total depreciation is $84,825, and the annual depreciation is $12,117.86.
Examples
Understanding depreciation is crucial in business for tax purposes and asset valuation. For instance, if a company buys a delivery truck, they can't deduct the entire cost in the first year. Instead, they depreciate it over its useful life, like 5 years. This annual depreciation expense reduces their taxable income, saving them money on taxes. Also, knowing the depreciation helps them understand the true value of their assets over time, which is important for financial planning and making informed decisions about when to replace equipment.
The total cost of the asset is $91,825, the total depreciation amounts to $84,825, and the annual depreciation is $12,117.86 when using the straight-line method.
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