A piece of equipment is purchased on May 1, 2007 for $80,000 and has a residual value of $5,000. The equipment's useful life is 8 years or 12,500 hours. It is used 2,700 hours in 2007, and 2,600 in 2008.
The question is what is the book value on December 31, 2009 if I use the straight-line method.
The answer is not 51,875.
To calculate the book value of the equipment using the straight-line method, we need to determine the annual depreciation expense and then subtract it from the initial cost of the equipment.
To calculate the annual depreciation expense using the straight-line method, we will subtract the residual value from the initial cost and divide it by the useful life of the equipment.
Initial Cost: $80,000
Residual Value: $5,000
Useful Life: 8 years or 12,500 hours
Firstly, we need to calculate the annual depreciation expense:
Depreciation Expense = (Initial Cost - Residual Value) / Useful Life
Depreciation Expense = ($80,000 - $5,000) / 8
Depreciation Expense = $75,000 / 8
Depreciation Expense = $9,375 per year
Now we can calculate the book value at the end of 2009 by subtracting the total accumulated depreciation from the initial cost.
Accumulated Depreciation = Depreciation Expense * Number of Years
Accumulated Depreciation = $9,375 * 3 (since 2007, 2008, 2009 are all counted)
Accumulated Depreciation = $28,125
Book Value = Initial Cost - Accumulated Depreciation
Book Value = $80,000 - $28,125
Book Value = $51,875
Based on the calculation, the book value on December 31, 2009, using the straight-line method, is $51,875. Therefore, the answer provided is correct.