Question

Orange Corp. constructed a machine at a total cost of $62 million. Construction was completed at the end of 2014 and the machine was placed in service at the beginning of 2015. The machine was being depreciated over a 7-year life using the sum-of-the-years'-digits method. The residual value is expected to be $2 million. At the beginning of 2018, Orange decided to change to the straight-line method. Ignoring income taxes, what will be Orange's depreciation expense for 2018? (Do not round your intermediate calculation and round final answer to 1 decimal place.)

Multiple Choice

$5.4 million.

$7.9 million.

$5.9 million.

$8.6 million.

Answer 1

Orange's depreciation expense for 2018 under Straight Line Method = $5.4 Million

Workings

Depreciation for 3 Years under Sum of years digit method

2015 = ($60 – 2) x 7/28 = $15 Million

2016 = ($60 – 2 ) x 6/28 = $ 12.86 Million

2017 = ($60 – 2 ) x 5/28 = $ 10.71 Million

Total Accumulated Depreciation under Sum of years digit method

= $15 + $12.86 + $10.71 = $38.57 Millions

Remaining Usefull Life = 7 Years – 3 Years Depreciated = 40 Years

Book Value at the end of 2017 = $62 - $38.57 = $23.43 Million

Orange's depreciation expense for 2018 under Straight Line Method

= (Book Value – Residual Value ) / Remaining Usefull Life

= ($23.43 - $2 ) / 4 Years

= $5.4 Million