Jennings Advertising Inc. reported the following on its December 31, 2002, balance sheet:Equipment $500,000Accumulated depreciation—equipment $135,000In a footnote, Jennings indicates that it uses straight-line depreciation over 10 years and estimates salvage value as 10% of cost. What is the average age of the equipment owned by Jennings?
Question
Jennings Advertising Inc. reported the following on its December 31, 2002, balance sheet:Equipment 135,000In a footnote, Jennings indicates that it uses straight-line depreciation over 10 years and estimates salvage value as 10% of cost. What is the average age of the equipment owned by Jennings?
Solution
To calculate the average age of the equipment owned by Jennings, we first need to understand how straight-line depreciation works.
Straight-line depreciation is a method of calculating the depreciation of an asset where the asset loses equal value each year over its useful life.
In this case, Jennings Advertising Inc. uses straight-line depreciation over 10 years and estimates salvage value as 10% of cost.
The cost of the equipment is 50,000.
The total depreciation over the life of the equipment is the cost of the equipment minus the salvage value, which is 50,000 = $450,000.
This total depreciation is spread over 10 years, so the annual depreciation is 45,000.
The accumulated depreciation reported on the balance sheet is $135,000.
To find out how many years this represents, we divide the accumulated depreciation by the annual depreciation: 45,000 = 3 years.
So, the average age of the equipment owned by Jennings is 3 years.
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