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22 June, 16:24

A company purchased new furniture at a cost of $16,000 on January 1. The furniture is estimated to have a useful life of 6 years value. The company uses the straight-line method of depreciation. What is the book value of the furniture on December 31 of the first year? A. $16,000 B. $15,000 C. $2.500 D. $13,500 E. $13.333

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  1. 22 June, 16:27
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    E. $13,333

    Explanation:

    Depreciation is the reduction in economic service potential of an asset over a period of time due to wear, tear e. t. c

    However, when you charge depreciation there is no cash flow i. e movement of cash this is because the cost of the asset has been paid and what the concept of Depreciation aims to achieve is to spread this cost over the useful life of the asset.

    Cost - $16,000

    Useful life - 6 years

    Method of depreciation - Straight line method

    Formula - (Cost - Scrap Value) / Useful life

    Straight Line Method - This means that an equal amount is charged over the useful life of the asset i. e the same amount would be charged for the 6 years.

    ($16,000 - 0) / 6 years = $2,667

    (Note scrap value wasn't given that's why it is 0)

    The book value is (Cost - Accumulated Depreciation) $16,000-$2667 = $13,333.
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