Question

Problem 11-1

Tamarisk Company purchased Machine #201 on May 1, 2017. The following information relating to Machine #201 was gathered at the end of May.

Price		$90,100
Credit terms		2/10, n/30
Freight-in		$ 848
Preparation and installation costs		$ 4,028
Labor costs during regular production operations		$11,130

It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Tamarisk intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,590. The invoice for Machine #201 was paid May 5, 2017. Tamarisk uses the calendar year as the basis for the preparation of financial statements.

Compute the depreciation expense for the years indicated using the following methods.

	Depreciation Expense
Straight-line method for 2017	$7,632.00
Sum-of-the-years'-digits method for 2018	1.$_____________
Double-decling-balance method for 2017	$15,529.00

The answer is not 14,480. I need help with the sum-of-the-years'-digits method for 2018.

Answer 1

Assumption - 1: Company is following Sum of years' digit method since 2017

Cost of Machine = Price less Discount @ 2%

= 90100 - (90100*2%)

= 90100 - 1802

= $88298.

Total value of Machine = $(88298 + 848 + 4028)

= $93174.

Useful Life = 8 years

Salvage value = $1590

Depreciable Value = $(93174 - 1590) = $ 91584

Sum of years = n(n+1)/2 = 8(9+1)/2 = 36

Depreciation for 1st year = (Depreciable Value*remaining useful life)/ Total sum of years

= $(91584 * 8)/36 = $20352

Depreciation for 2nd year = (Depreciable Value*remaining useful life)/ Total sum of years

= $(91584 * 7)/36 = $17808

Depreciation for 2018 = (Depn of 1st year * 4/12) + (Depn of 2nd year * 8/12) {since machine was purchased on 1st May 2017}

= $ (20352*4/12) + (17808*8/12)

= $ 18656.

Assumption - 2: Company has changed its method of depreciation from Straight line to Sum of years' digit method in the year 2018

Cost of Machine = Price less Discount @ 2%

= 90100 - (90100*2%)

= 90100 - 1802

= $88298.

Total value of Machine = $(88298 + 848 + 4028)

= $93174.

Useful Life = 8 years

Salvage value = $1590

Depriciation of 2017 using Straight Line Method (for 8 months) = $7632

Calculation of Depreciation under Sum of Year's Digit Method for 2018

Value of Machine as on 1st January 2018 = $(93174 - 7632) = $85542

Depreciable Value as on 1st January 2018 = $(85542-1590) = $83952

Remaining Useful Life = 7years and 4 months = 7.33 years

Sum of years = n(n+1)/2 = 7.33(7.33+1)/2 = 30.53

Depreciation for 2018 = (Depreciable Value*remaining useful life)/ Total sum of years

= $(83952*7.33)/30.53

= $ 20156.18