Question

Cutter Enterprises purchased equipment for $72,000 on January 1, 2021. The equipment is expected to have a five-year life and a residual value of $6,000 Using the sum-of-the-years-digits method, depreciation for 2022 and book value at December 31, 2022, would be: (Do not round depreciation rate per year) $19200 and $30, 800 respectively $17.600 and $26.400 respectively $17.600 and $32.400 respectively $19.200 and $28 800 respectively

Answer 1

Correct answer is $17,600 and $32,400 respectively. The workings are as follows.

Given data,

Purchase price of the asset = $72,000

Estimated residual value of the asset = $6,000

Estimated useful life of the asset = 5 Years

Formula for depreciation under sum-of-the-years-digit method = (purchase price of asset - Residual value of asset) * Remaining useful life of asset / Sum of years of useful life of asset

a. Depreciation expense for Year 1, i.e. December 31, 2021 = ($72,000 - $6,000) * 5 / 15 = $22,000

b. Book value at the end of Year 1, i.e. December 31, 2021 = $72,000 - $22,000 = $50,000

c. Depreciation expense for Year 2, i.e. December 31, 2022 = ($72,000 - $6,000) * 4 / 15 = $17,600

d. Accumulated depreciation at the end of Year 2, i.e. December 31, 2022 = $22,000 + $17,600 = $39,600

e. Book value at the end of Year 2, i.e. December 31, 2022 = $72,000 - $22,000 - $17,600 = $32,400

Therefore, the depreciation for 2022 is $17,600 and book value at December 31, 2022 is $32,400 respectively.