Green Deer Company purchased a tractor at a cost of $220,000. The tractor has an estimated residual value of $20,000 and an estimated life of 8 years, or 12,000 hours of operation. The tractor was purchased on January 1, 2012 and was used 2,400 hours in 2012 and 2,200 hours in 2013.

What amount will Green Deer Company report as depreciation expense over the 8-year life of the equipment using straight-line depreciation?

Select one:

A. $ 20,000

B. $120,000

C. $200,000

D. $100,000

C. $200,000

Explanation:

Straight Line depreciation is a method of depreciation in which the cost of the asset net of residual value is divided over useful life.

In this question the tractor cost is $220,000 which needs to be depreciated after deducting residual value from cost of Tractor.

Use following Formula to calculate the straight line depreciation.

Depreciation rate = ( Cost - Salvage Value ) / useful life = ($220,000 - $20,000) / 8 = $25,000 per year

Depreciated in 8 years = $25,000 x 8 = $200,000

We can also consider the depreciable value as the total depreciation in 8 years because the useful life of the tractor is also 8 years.