Question

On January 1, 2020, Concord Corporation purchased a new machine for $4260000. The new machine has an estimated useful life of nine years and the salvage value was estimated to be $147000. Depreciation was computed using the sum-of-the-years'-digits method. What amount should be shown in Concord's balance sheet at December 31, 2021, net of accumulated depreciation, for this machine? $4113000 $2706200 $2614800 $3437400

Answer 1

Sum of the digits method takes into account the original value of the asset, the salvage value and the useful life of the asset in years. It takes the total number of years the asset can be depreciated, adds up those years, and uses that number as a base to weight the depreciation amounts in an accelerated way

Applicable percentage = number of years of estimated life at the beginning of the year / n(n+2)

where n is estimated useful life

So in this question

depreciation percentage for first year is 9/45

deperciation percentage for second year= 8/45

Depreciation for first year = (cost - salvage value) * applicable percentage

= (4260000 - 147000) * 9/45  

= 822,600

Depreciation for second year = (4260000- 147000) * 8/45

= 731,200

Amount shown in Concord's balance sheet at December 31, 2021, net of accumulated depreciation, for this machine is 4260000 - 822600 - 731200 = $2,706,200