A depreciable asset was purchased for $8,000. The estimated useful life of the asset is 5 years. The estimated salvage value is $500. What is the amount of depreciation expense for each year under the straight line method?

The estimated amount of depreciation expense is $1,500

Explanation:

Depreciation means a permanently and continuous diminution in value or quaof a tangible non-current asset. Depreciation occurs over several years. Every year a non-current asset is used, the price of that asset reduces drastically. There are various methods used to solve the rate of depreciation. There is the straight line method and reducing balance method. The question requires to be solved using the straight line method.

The formula for solving depreciation using a straight line method is ; (Cost less Estimated scrap value) ÷ Number of expected years of use.

Replacing with figures, we have: ($8,000 - $500) ÷ 5 years = $1,500. Therefore, $1,500 is our estimated amount of depreciation expense.

$1,500.

Explanation:

Depreciation is an accounting method that is used by companies to allocate the cost of depreciable asset over its useful life. Where, depreciable asset is an asset that losses its value as the time goes on. For example, machine, vehicle, building, equipment etc. In-other words, the tangible fixed asset except land are all depreciable assets. In-tangible fixed assets cost is also allocated to profit or loss statement but the accounting method used there is known as Amortization.

So, depreciation is the systematic allocation of cost of an asset to profit or loss statement. The need of depreciation is because of matching principle which require companies to record expense in a period in which the revenue against is recognized. The reasons for depreciation is that asset losses its worth over time, moreover, for taxation purposes. As per IAS-16, there are two methods of depreciation:

1) Straight-line method --- Allocating cost evenly.

2) Reducing-balance method --- Allocating higher portion of cost in initial years.

In this case, we are required to calculate the depreciation expense for each year under the straight line method. The formula for it is:

Depreciation expense p.a. = (Cost - Salvage value) / Useful Life

⇒ Depreciation expense p.a. = (8,000 - 500) / 5 = $1,500.

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