CFA Level I · CFA Level I Exam · Analysis of Long-Term Assets
A company buys equipment for 530,000 and expects to sell it for 50,000 after 8 years. It uses straight-line depreciation. Annual depreciation expense is closest to:
Annual straight-line depreciation is about 60,000. The depreciable amount is cost less residual value, 530,000 minus 50,000, or 480,000, spread over 8 years. Ignoring the residual value would wrongly give 66,250.
- A50,000
- B60,000Correct
- C66,250
Explanation
Depreciable amount = 530,000 - 50,000 = 480,000. Divided by 8 years = 60,000. Ignoring salvage value gives 66,250, which is wrong because salvage value reduces the depreciable base.
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