A new vehicle was purchased on January 1 for $38,000.

Question

It has a salvage value of $7,000 and a useful life of 5 years.  Using the straight-line method, how much will the depreciation expense for the vehicle be for the first year.

A)  $517

B)  $6,200

C)  $7,600

D)  $633

Answer 1

The straight line method means there’s a linear relationship between the value and the number of years.

So if y is the value and x the number of years, at x=0, y=38000 and at x=5, y=7000. From these we can find the slope, or rate of depreciation: (38000-7000)/5=$6200 per year. Using y=mx+b where m is the gradient or slope, and b is the y intercept. The slope is negative because the value depreciates so we have y=38000-6200x. When x=1, y=38000-6200=$31800, a depreciation of $6200 in the first year, answer B.