ACCA Applied Knowledge · Financial Accounting · Depreciation
Kestrel Ltd bought a machine on 1 January 20X1 for $85,000 with an expected useful life of 5 years and an expected residual value of $10,000. It uses the straight-line method. What is the annual depreciation charge?
The annual charge is $15,000. Straight-line depreciation spreads the depreciable amount, which is cost less residual value ($85,000 minus $10,000 = $75,000), evenly over the five-year useful life. Ignoring the residual value would overstate the charge at $17,000.
- A$15,000Correct
- B$17,000
- C$19,000
- D$16,000
Explanation
Straight-line depreciation = (cost - residual value) / useful life = (85,000 - 10,000) / 5 = $15,000. Using cost without deducting residual value gives $17,000, which is wrong because the residual amount is not depreciable.
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