A building was purchased for $60,500. The asset has an expected service life of eight years and depreciation expense each year is $5,000 using the straight-line method. What is the residual value of the building?Multiple Choice$20,500$0$12,562$7,562
Question
A building was purchased for 5,000 using the straight-line method. What is the residual value of the building?Multiple Choice07,562
Solution
The residual value of an asset is the estimated amount that an entity would currently obtain from disposal of the asset, after deducting the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life.
In this case, the building was purchased for 5,000. The expected service life of the building is eight years.
To calculate the residual value, we need to subtract the total depreciation over the life of the asset from the original cost of the asset.
The total depreciation over the life of the asset is calculated as follows:
Depreciation expense per year * Service life = Total depreciation 40,000
Then, we subtract the total depreciation from the original cost of the asset to find the residual value:
Original cost - Total depreciation = Residual value 40,000 = $20,500
So, the residual value of the building is $20,500.
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