Question

JKL Inc. purchases a car for $21,000 on January 1st, 2011. The vehicle is estimated to have a useful life of 10 years, at which point it will have a residual value of $1,000. JKL Inc. uses the straight-line method to account for depreciation. What is the accumulated depreciation and book value respectively in 5 years?

Answer 1

It depreciates equally for 10 years, dropping from $21,000 to $1,000 over that 10 year period. In other words, it drops $20,000 over 10 years, right?

Answer 2

yeah

Answer 3

Straight line depreciation means it drops the same amount every year, so in 5 years, it would drop half as much as it does in all 10 years.

Answer 4

so i got 2000 for the depreciation of 10 years and 4000 for 5 years but its a multiple choice and there is 10,000 , 11,000, and 12,000 as answers

Answer 5

2000 is the depreciation for EACH year

So after 5 years, it would have gone down 2000*5

Answer 6

can you get the book value? That is the amount of value left from the original after 5 years of depreciating $2000 each year.

Answer 7

book value is the same as the as the depreciation is it not? I just truly didn't understand what residual value meant.

Answer 8

It's just the terms they use...
Book value is the value left on the item after some period of time in which it has depreciated.
Residual value is like the amount you could sell the item for after you have depreciated it all the way.

So you started with a $21000 car. Each year, it drops $2000 in book value, so after year 1, it is only worth $19,000. After years 2, 3, 4, and 5, it drops to $17,000, then $15,000, then $13,000, then $11,000. These are the "book values" after each year... the amount of remaining value on the car.

If you kept on depreciating the 5 more years, or 10 total, you would drop $2000 every year and end up with book value of only $1000. Since that is the end of your 10-year depreciation period, you also call that final amount the "residual value"... it's what is leftover after all depreciating. In theory, you should be able to sell that 20-year-old-car for the residual value of $1000.

Answer 9

ok thank you so much!

Answer 10

glad to help... once you know the terms they use, the math itself isn't very hard.

Answer 11

I sometimes think they made up the terms to make accounting seem more mysterious :)