Question

Baker, Inc. uses the sum-of-the-years’-digits method to depreciate a $79,600.00 piece of equipment that has an estimated life of 20 years. The salvage value is $4,000.00. The book value at the end of year 2 is

Answer 1

Using the sum of the years digits method

Step 1:

We sum up all the digits of the estimated life of equipment.

i.e. 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 + 12 + 13 + 14 + 15 + 16 + 17 + 18 + 19 + 20 = 210

Step 2:

We count the years spent from the back. i.e. year 2 is equivalent to 19 in the years digits.

Given that the cost of the equipment is $79,600.00 with a salvage value of $4,000.00. This means that the depreciable amount of the equipment is given by $79,600.00 - $4,000.00 = $75,600.00

The depreciation charge on the equipment for year 1 is given by

$\frac{20}{210} \times\ 75,600=\ 7,200$

while the depreciation charge on the equipment for year 2 is given by

$\frac{19}{210} \times\ 75,600=\ 6,840$

The book value of an equipment is given by the cost of the equipment minus the accumulated depreciation.

Therefore, the book value of the equipment at the end of year 2 is given by

$79,600 - $7,200 - $6,840 = $65,560