Question

A central air conditioning unit was installed on January 1, 2000 at an initial cost of
P650,000 and was expected to have a salvage value of P50,000 after a life of 7 years. a.
What amount of depreciation had accumulated in a sum-of-the-years’-digit method at the
end of 2003? b. Using the declining balance method, determine the depreciation charged
for 2004 and the book value at the end of 2004. c. If the equipment was sold on Jan 1,
2005 for P100,000, what amount of loss would result from this sale if sinking fund method
was being used with interest of 12% per year?

Show a complete and logical solution

Answer 1

Calculation of Accumulated Depreciation by Given Information
Cost of the Machinery	$6,50,000
Estimated Useful Life	7
Salvage Value	$50,000
Depreciation per Year	$85,714
Accumulated Depreciation is calculated using the formula given below
Accumulated Depreciation = ((Cost of Asset - Salvage Value)/ Life of the Asset) * No.of years
	2003	2004	2005
Accumulated Depreciation	$2,57,143	$3,42,857	$4,28,571
Book Value of the Asset	$3,92,857	$3,07,143	$2,21,429
Sale Value on 1st Jan 2005			$1,00,000
Profit/Loss			($1,21,429)

Book Value of the Asset is calculated as original cost of the asset minus the accumulated depreciation.

The original purchase price of the asset, minus all accumulated depreciation. Subtract this carrying amount from the sale price of the asset. If the remainder is positive, it is a gain. If the remainder is negative, it is a loss.