Question

A widget machine your company has just purchased for $120,000 has an expected salvage value of $25,000. It has an expected life of 8 years. Develop a sum-of-the-years-digits depreciation schedule with half year convention. Please show book value at the beginning of each year in your depreciation schedule. Remember to show all of your work.

Answer 1

Sum-of-the-years-digits depreciation results in faster depreciation when the asset is new. It is more suitable for the asset which provides more value to the firm when it is new and tends to slow down as it ages.

Formula: Depreciation for the year = Depreciable cost * (Remaining useful life/ Sum of the years digit)
where Depreciable cost = (Asset cost - Salvage Value) = (120,000 - 25,000) = $ 95,000
Sum of the years digit = (1+2+3+4+5+6+7+8) = 36

Like, Depreciation for the first year (half year convention) = 95000 * (8/36) * 1/2 = 95000 * 0.1111 = $ 10,554.50

Likewise, Depreciation fot the 2nd year = 95000 * (7.5 / 36) = 95000 * 0.2083 = $ 19,788.50.

Depreciation expenses for all other years are drawn in same way.

*Half year convention means, it is assumed that an asset is purchased and put into work right in the middle of the year of the acquisition. So, the depreciation for this year will also be the half of the depreciation would have actually drawn for the first year.

*still any problem to understand anything regarding this solution, feel free to ask. thanks.