The cost of depreciation is
= (Purchase cost - residual value) × useful life ÷ (sum of years)
= ($84,000 - $8,400) × 5 years ÷ (1 + 2 + 3 + 4 + 5)
= $75,600 over 5 years, then 15 years.
= $25,200
The book value is also
= Purchase price minus depreciation costs
= $84,000 - $25,200
= $58,800
Depreciation is an accounting technique for spreading out the expense of a tangible item over the course of its useful life. The amount of depreciation shows how much of an asset's worth has been utilized. It enables businesses to purchase assets over a predetermined length of time and generate income from those assets.
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