Business

Question

On January 1, 2021, Canseco Plumbing Fixtures purchased equipment for $40,000. Residual value at the end of an estimated 7 year service life is expected to be $12,000. The company expects the equipment to operate for 12,500 hours. Required: a. Calculate depreciation expense for 2021 and 2022 using sum-of-the-years’-digits assuming the equipment was purchased on January 1, 2021. b. Calculate depreciation expense for 2021 and 2022 using sum-of-the-years’-digits assuming the equipment was purchased on March 31, 2021.

1 Answer

  • Answer:

    Part a

    2021  = $7,000

    2022  = $6,000

    Part b

    2021  = $5,250

    Explanation:

    Sum of the year`s digit method provide for higher depreciation in early life of the asset with lower depreciation in later years.

    Step 1

    Some of digits calculation :

    Year      Digits

    2021        7

    2022       6

    2023       5

    2024       4

    2025       3

    2026       2

    2027        1

    Total      28

    Step 2

    Determine the depreciable amount

    Depreciable amount = Cost - Residual value

                                       = $40,000 - $12,000

                                       = $28,000

    Step 3

    Depreciation expense calculations

    2021 = 7 / 28 x $28,000 = $7,000

    2022 = 6/ 28 x $28,000 = $6,000

    assuming the equipment was purchased on March 31, 2021

    2021 = $7,000 x 9/12 = $5,250

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