On January 1, a machine with a useful life of five years and a residual value of $5,000 was purchased for $25,000. What is the depreciation expense for year 2 under straight-line depreciation?

a. $5,000

b. $15,000

c. $4,000

d. $12,000

c. $4,000

Explanation:

Depreciation expense is the appropriate portion of a company's fixed asset's cost that is being used up during accounting period. Under straight-line method, depreciation expense is calculated by formula:

Straight-Line Depreciation Expense = (Cost - Residual Value) / Useful Life of the Asset

For year 2, depreciation expense = ($25,000-$5,000) / 5 = $4,000

Noted:

Depreciation Expense is different from Accumulated depreciation. Accumulated depreciation is the total amount of depreciation expense for an fixed asset that is recorded on the balance sheet. In this situation, the Accumulated depreciation after 2 years is:

Depreciation expense in year 1 + Depreciation expense in year 2 = $8,000