Wilshire purchased equipment at the beginning of 2011 for $19,000. Wilshire decided to depreciate the equipment over a 6-year period using the straight-line method. Wilshire estimated the equipment's salvage value at $1,000. The estimated fair market value at the end of 2011 was $18,000. Which of the following statements is correct concerning Wilshire's financial statements at December 31, 2011?
A) The book value of the equipment is $15,000.
B) The book value of the equipment is $16,000.
C) The total accumulated depreciation is $3,167.
D) The equipment will be reported on the balance sheet at it fair market value of $18,000.

Question

Quizplus · Accepted Answer

Using the straight-line method of depreciation, the annual depreciation expense is calculated as follows:

Depreciation Expense = (Cost of Equipment - Salvage Value) / Useful Life

Depreciation Expense = ($19,000 - $1,000) / 6 = $3,000 per year

At the end of the first year, Wilshire would have recorded depreciation expense for the year of $3,000. Therefore, the book value of the equipment at the end of the first year would be:

Book Value = Cost of Equipment - Accumulated Depreciation 
Book Value = $19,000 - $3,000 = $16,000

Since the estimated fair market value at the end of 2011 was also $18,000, the equipment's fair market value is higher than its book value. However, generally under GAAP, assets are reported on the balance sheet at their book value, not fair market value. Therefore, choice D is incorrect. The total accumulated depreciation at the end of the first year would be $3,000, calculated as follows:

Accumulated Depreciation = Depreciation Expense * Number of Years Depreciated 
Accumulated Depreciation = $3,000 * 1 = $3,000

Therefore, choice C is also incorrect. The correct answer is B, "The book value of the equipment is $16,000."

Wilshire Purchased Equipment at the Beginning of 2011 for $19,000