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CFA Level I · CFA Level I Exam · Analyzing Balance Sheets

A company bought machinery for 500,000 with a 5-year life, a residual value of 50,000, and uses straight-line depreciation. At the end of year 2, the machinery's carrying amount is closest to:

The carrying amount is about 320,000. Annual straight-line depreciation is (500,000 − 50,000)/5 = 90,000, so two years give 180,000 accumulated depreciation, leaving 500,000 − 180,000 = 320,000.

  1. A300,000
  2. B320,000Correct
  3. C400,000

Explanation

Annual depreciation = (500,000 − 50,000)/5 = 90,000. After two years accumulated depreciation is 180,000, so carrying amount = 500,000 − 180,000 = 320,000. The 300,000 option wrongly uses cost/5 with residual ignored in the wrong way (500,000 − 2×100,000); 400,000 is one year only.

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