Santiago corporation bought equipment on january 1. the equipment cost $320,000 and had an expected salvage value of $40,000. the life of the equipment was estimated to be 7 years and straight-line depreciation is used. the book value of the equipment at the end of the fifth year would be
a) $168,000
b) $320,000
c) $200,000
d) $120,000
e) $150,000

The correct answer is D = $ 120,000.

Explanation:

Determining the depreciation base

Depreciation base =Acquisition cost - Salvage Value

Depreciation base =320,000 - 40,000.

Depreciation base =$280,000.

Determining the depreciation rate.

Depreciation rate = depreciation base/Useful life.

Depreciation rate = 280,000/7.

Depreciation rate =$ 40,000.

Determining accumulated depreciation.

Accumulated depreciation = depreciation rate × number of years.

Accumulated depreciation = 40,000 × 5.

Accumulated depreciation = $200,000.

Determining the book value of the equipment.

Book value of the equipment = Acquisition cost - Accumulated depreciation.

Book value of the equipment = 320,000 - 200,000.

Book value of the equipment = $120,000.

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