Hot Wort Ltd. purchased equipment on April 1, 2020, for $140,000. The residual value is $20,000 and the estimated life is 6 years or 55,000 hours. Compute depreciation expense for the year ending December 31, 2020 if Hot Wort Ltd. uses the straight-line method of depreciation.

Question

Quizplus · Accepted Answer

To calculate the annual depreciation expense using straight-line method, we use the formula:

Depreciation Expense = (Cost of Asset – Residual Value) ÷ Useful Life

Where,

Cost of Asset = $140,000
Residual Value = $20,000
Useful Life = 6 years

So,

Depreciation Expense = ($140,000 - $20,000) ÷ 6 years
Depreciation Expense = $120,000 ÷ 6 years
Depreciation Expense = $20,000 per year

Since the equipment was purchased on April 1, 2020, it was used for 9 months in 2020 (April to December). Therefore, the depreciation expense for the year ending December 31, 2020 would be:

Depreciation Expense = ($20,000 ÷ 12 months) x 9 months
Depreciation Expense = $15,000

Hence, the correct answer is D.