Question

MC Qu. 41 Cutter Enterprises purchased equipment... Cutter Enterprises purchased equipment for $78,000 on January 1, 2018. The equipment is expected to have a five-year life and a residual value of $4,800. Using the sum-of-the-years'-digits method, depreciation for 2019 and book value at December 31, 2019, would be: (Do not round depreciation rate per year)

Answer 1

Calculation of Depreciation expense by using um of year digit method:

Purchase price of equipment = $78000

Residual value = $4800

Useful life = 5 years

Sum of year digit = n (n+1)/2 = 5 (5+1)/2 = 15   [Where n = estimated useful life]

Remaining useful life in year 2019 = Useful life – year of asset already used = 5-1 = 4 years

Depreciation expense in year 2019 =

(Purchase price of equipment - Residual value)*Remaining useful life / sum of year digit

= ($78000 - $4800)*4/15 = $73200*4/15 = $19520

Depreciation expense in year 2018 =

(Purchase price of equipment - Residual value)*Remaining useful life / sum of year digit

= ($78000 - $4800)*5/15 = $73200*5/15 = $24400

Accumulated Depreciation = 24400 + 19520 = 43920

Book value of the equipment at year end 2019 =

Purchase price of equipment – Accumulated Depreciation = $78000 –$43920 = $ 34080