Ms. Lollipop opened a candy store in December 2013. She rented a building for $25,000 a year and used $30,000 from her savings account, which earned an annual interest rate of 5 percent, to buy capital equipment. In December 2014, the market value of her capital equipment was $26,000. What is the economic depreciation of Lollipop's capital?
A) $3,000
B) $4,000
C) $1,000
D) $25,000

Question

Quizplus · Accepted Answer

Economic depreciation is the decrease in the market value of a capital asset over a given period of time. In this case, the market value of Ms. Lollipop's capital equipment decreased from $30,000 to $26,000 in one year, which means the economic depreciation is $4,000. The other options are not applicable as they do not reflect the change in the market value of the asset. Option A is the difference between the rent paid in 2013 and 2014, which is not relevant to the calculation of economic depreciation. Option C is the annual interest earned on the savings account and option D is the total cost of renting the building, neither of which are relevant to the calculation of economic depreciation.

Ms Lollipop Opened a Candy Store in December 2013