Answer:
Salvage value = $12000
Explanation:
Sum-of-year's digits is a form of accelerated depreciation which believes that the productivity of an asset reduces overtime, hence so does its depreciation cost. This is calculated as follows:
(Remaining useful life of the asset / sum of the year's digits) x depreciation cost
<u>OR</u>
(Remaining useful life of the asset / sum of the year's digits) x (Cost of asset - salvage value)
<em>In this case however, we are unaware of total depreciation cost as well as the salvage value. We can use the information provided to obtain these and ultimately answer the question :)</em>
We can obtain the <em>sum of years depreciation</em> as follows:
Total number of useful life years = 8
Hence, sum of the year's digits is = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36
We also know the <em>depreciation expense</em> for the third year, which is $18000.
In January 2018 (third year), the<em> remaining useful life of asset</em> is = 8 - 2 = 6
If we substitute this into the equation, we can find the depreciation cost.
Depreciation cost x (6/36) = 18000
Depreciation cost = 18000 x (36/6)
Depreciation cost = $108,000.
Now to calculate salvage value:
Cost of asset - Depreciation cost = Salvage value
Salvage value = $120,000 - $108,000 = $12000