Question

A car was purchased for $12,000 with a salvage value of $3000. It is

Answer 1

Answer:

B.$9,000

Step-by-step explanation:

The sum of years method is used to calculate the depreciation of an asset. Depreciation is the decrease value of an asset, because it's assumed that its value decreases over time.

We need to calculate a Depreciation Base or Depreciable Cost, and Depreciation Fraction, as the formula attached indicates.

First, the Depreciation Base is calculated by subtracting the total amount $12,000 with the salvage value $3,000 which results in $9,000.

(the salvage value is an estimation of the book value of the asset after the depreciation).

Second, we know that the Remaining Useful Life of the Asset is 5 years, and the sum of the years digits is 1 + 2 + 3 + 4 + 5 = 15, which give us 5/15 as Depreciation Fraction. Then, we are able to calculate the Depreciation Expense.

Depreciation Expense = (5/15)x9000 = $3,000.

So, the book value at the end of the first year will show: $12,000 - $3000 = $9,000.

This means that the fist year the asset will lose $3,000 of its value. Companies calculate the depreciation of all the assets to know the productivity.