ABE TUTORIALS

PROBLEM 26: STRAIGHT-LINE DEPRECIATION ANALYSIS

A CONTRACTOR IMPORTED EQUIPMENT FOR 1.2 MILLION PESOS. CUSTOMS, INSTALLATION, AND OTHER INITIAL COSTS INCURRED TO MAKE THE EQUIPMENT SERVICEABLE AMOUNTED TO P200,000. AT THE END OF 5 YEARS, THE EQUIPMENT WILL HAVE A MARKET VALUE OF P200,000. IF DEPRECIATED BY THE STRAIGHT-LINE METHOD, WHAT IS THE CUMULATIVE DEPRECIATION THROUGH THE END OF THE SECOND YEAR?

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a. P200,000

b. P240,000

c. P400,000

d. P480,000

Correct Answer: D (P480,000)

Step 1: Determine the First Cost (FC)

The total initial investment includes the purchase price plus all costs to make it serviceable.
FC = P1,200,000 + P200,000 = P1,400,000

Step 2: Calculate Annual Depreciation (d)

Salvage Value (SV) = P200,000
Life (n) = 5 years
d = (FC - SV) / n
d = (P1,400,000 - P200,000) / 5 = P240,000 per year

Step 3: Calculate Cumulative Depreciation (D2)

D2 = Annual Depreciation × 2 years
D2 = P240,000 × 2 = P480,000

Result: d. P480,000