CPA Exam - FAR (Financial Accounting and Reporting)Financial ReportingEasy
A company is preparing its year-end financial statements. On December 1, Year 1, the company purchased a building for $1,000,000. The building has an estimated useful life of 40 years and a salvage value of $100,000. The company uses the straight-line depreciation method. What is the depreciation expense for the building for the year ended December 31, Year 1?
- A$25,000
- B$1,875
- C$22,500
- D$2,250
Show answer & explanationAnswer & explanation
Correct answer: B. $1,875
Straight-line depreciation calculates annual depreciation as (Cost - Salvage Value) / Useful Life. Since the asset was purchased on December 1, only one month of depreciation should be recognized for the year.
Why the other options are wrong
- A. This is incorrect. It represents the annual depreciation without considering salvage value.
- C. This is incorrect. It seems to be an annual depreciation amount, not for one month.
- D. This is incorrect. It may reflect a miscalculation of the monthly amount.
Straight-Line Depreciation
A depreciation method that allocates an equal amount of an asset's depreciable cost to each accounting period over its useful life.
- Formula: (Cost - Salvage Value) / Useful Life.
- Results in consistent depreciation expense each period.
- Often used for assets whose economic benefits are consumed evenly over time.
Memory trick: STRAIGHT-line means EVEN steps down, from cost to salvage.