Question

Note: Show all of your work to arrive at a final result, 1) Using sum-of-the-years-digits depreciation, determine the depreciation schedule for an asset that has an initial cost of $140,000, a salvage value of $20,000, and a depreciation life of three years.

Answer 1

Sum-of-the-digits depreciation method is based on the understanding that an asset is most efficient and productive in the early years of its operation. Hence, this method tends to charge for maximum depreciation in the early years of the asset. The depreciation that is deducted during particular period is calculated by taking fraction of the remaining useful life of the asset to the sum-of-the-digits of the total useful life of the asset and multiplying this fraction with the total depreciable value of the asset.

i.e. Depreciation cost for a particular year = (Remaining years of operation of asset ÷ Sum of the digits of the total useful life of asset)* Total depreciable value of the asset

Total depreciable value of asset = Total cost of asset - Salvage value of the asset

Using the above equation and the values given in the question, we can calculate the depreciation and hence depreciation schedule as in the excel image attached here.

Ą On : Initial cost of asset = $140,000 Salvage value of asset= $20,000 Useful life = 3 years Depreciable value of asset = Initial cost of asset - Salvage value of asset Depreciable value = $140,000- $20,000= $120,000.00 Book value of asset = Initial cost of asset - total depreciation of asset so far

Depreciation for current year = Fraction for depreciation * Depreciable value of asset

So, depreciation schedule is as below in the Excel image:

E F G H asset Year Depreciable Remaining Fraction for Depreciation for Book value value of life of depreciation current year of asset asset 1 $120,000.00 3 3/6 $60,000.00 $80,000.00 2 $120,000.00 2 2/6 $40,000.00 $40,000.00 3 $120,000.00 1 1/6 $20,000.00 $20,000.00