Question

A company purchases a new computer for use by the company's controller. The company plans on using the computer for only 3 years. The computer cost $2,400. We need to review some data.

The computer will be worth $600 at the end of 3 years. The computer will be donated to a charity at the end of this period.

What is the asset's basis?

What is the economic life of the asset?

Which method should be used?

Answer 1

1)

Asset's basis is the cost to the computer which is $2400.

2)

Total cost of asset = $2400

Value of asset at the end of 3rd year = $600

Depreciation on asset in 3 years = 2400-600 = $1800

Depreciation per year = 1800/3 = $600

Economic life of asset is the life at the end of which salvage value of assets will be 0 or negligible i.e. asset is fully utilised till the end of economic life.

In the given question, if depreciation charged each year is $600, so at the end of 4th year, salvage value of assets become 0. So, Economic life of asset is 4 years.

3)

Straight line method of depreciation should be used for simplicity.In case of straight line method, the book value of asset will become 0 at the end of ecomecon life which is also the salvage value of asset.