Company A has equipment that cost $5,250,000 which has accumulated depreciation of $500,000 while Company B has equipment that costs $4,600,000 and has accumulated depreciation of $4,400,000. Assuming both companies use straight line depreciation and estimated useful lives of 40 years with $100,000 residual values, which of the following statements is true?
A)Both companies have relative old equipment.
B)Company A's equipment is older than Company B.
C)Company A's equipment is newer than Company B.
D)Company B's equipment has a higher book value than Company A.

Question

Quizplus · Accepted Answer

For straight line depreciation, the annual depreciation expense would be: 
($5,250,000 - $100,000) / 40 = $131,250 per year for Company A 
($4,600,000 - $100,000) / 40 = $112,500 per year for Company B 
Since Company A has only accumulated $500,000 in depreciation, this means that the equipment is relatively new and has not yet been fully depreciated. On the other hand, Company B has accumulated $4,400,000 in depreciation, indicating that the equipment is much older and has been mostly depreciated. Therefore, choice C is correct: Company A's equipment is newer than Company B's. Note that we cannot determine which company has older equipment relative to industry averages, as we do not have enough information.

Company a Has Equipment That Cost $5,250,000 Which Has Accumulated