Depreciation Expense Calculation for Year 3 | CFA Level 1 Exam Preparation

Depreciation Expense in Year 3

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Question

A firm has just acquired a long-term asset with a useful life of 5 years. Its acquisition cost was $65,000 and its salvage value is estimated at $10,000. If the firm uses straight-line depreciation method, what's the depreciation expense recognized in Year 3?

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A. B. C. D.

C

In Straight-line method, depreciation is constant at (1/n)*(acquisition cost - salvage value). In this case, depreciation = (1/5)*(65,000-10,000)=$11,000.

To determine the depreciation expense recognized in Year 3 using the straight-line depreciation method, we need to calculate the annual depreciation expense first. The formula for straight-line depreciation is:

Depreciation Expense = (Acquisition Cost - Salvage Value) / Useful Life

Given: Acquisition Cost = $65,000 Salvage Value = $10,000 Useful Life = 5 years

Substituting the given values into the formula:

Depreciation Expense = ($65,000 - $10,000) / 5 Depreciation Expense = $55,000 / 5 Depreciation Expense = $11,000

The annual depreciation expense is $11,000.

To find the depreciation expense recognized in Year 3, we need to determine how many years have passed. Since the asset has a useful life of 5 years, Year 3 would be the third year of its useful life.

The depreciation expense recognized in Year 3 would be equal to the annual depreciation expense, which is $11,000.

Therefore, the correct answer is C. $11,000.

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