Multiple Choice
You want to buy a new sports coupe for \$79,500. If you decide to invest in marketable securities to save for this purchase, which of the following best describes a marketable security?
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7. Receivables and Investments
Introduction to Investments in Securities
Multiple Choice
A company bought a computer for \$1,500. Three years later, the company decides to sell the computer. Under the cost method of accounting for investments in securities, at what amount should the computer be reported on the balance sheet immediately before the sale, assuming straight-line depreciation over 5 years and no residual value?
A
\$300
B
\$900
C
\$1,500
D
\$600
Verified step by step guidance1
Step 1: Understand the concept of straight-line depreciation. Straight-line depreciation is a method where the asset's cost is evenly spread over its useful life. The formula for annual depreciation expense is: \( \text{Annual Depreciation Expense} = \frac{\text{Cost of Asset} - \text{Residual Value}}{\text{Useful Life}} \).
Step 2: Identify the given values from the problem. The cost of the computer is \$1,500, the residual value is \$0, and the useful life is 5 years. These values will be used to calculate the annual depreciation expense.
Step 3: Calculate the annual depreciation expense using the formula: \( \text{Annual Depreciation Expense} = \frac{1500 - 0}{5} \). This will give the amount of depreciation allocated each year.
Step 4: Determine the total depreciation for 3 years. Multiply the annual depreciation expense by 3 (since the computer has been used for 3 years): \( \text{Total Depreciation} = \text{Annual Depreciation Expense} \times 3 \).
Step 5: Calculate the book value of the computer immediately before the sale. Subtract the total depreciation from the original cost of the computer: \( \text{Book Value} = \text{Cost of Asset} - \text{Total Depreciation} \). This is the amount that should be reported on the balance sheet.
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