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Gerard Inc. purchased a fixed asset for $75,000. It has an estimated useful life of 8 years with a salvage value of $3,000. Using the Sum of Years Digits method, determine the depreciation expense and book value for each of the 8 years. (Refer to the examples in the class notes and video). You may first want to work the problem out on scrap paper using a chart. *

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Answer:

Year        Depreciation Calculation  Accumulated Depreciation   Book Value

1                 8/36×72,000 = 16,000               16,000                           59,000

2                7/36×72,000 = 14,000               32,000                           36,000

3                6/36×72,000 = 12,000               44,000                           31,000

4                5/36×72,000 = 10,000               54,000                           21,000

5                4/36×72,000 = 8,000                 62,000                           13,000

6                3/36×72,000 = 6,000                 68,000                            7,000

7                2/36×72,000 = 4,000                 72,000                             3,000

8                1/36×72,000 =  2,000                 74,000                             1,000

Explanation:

Sum of Years digits method provides for higher depreciation to be charged early in life of an asset with lower depreciation in later years.

Depreciation Expense and Book Value Calculation

Sum of Digits = 8 +7+6+5+4+3+2+1 =36

Year        Depreciation Calculation  Accumulated Depreciation   Book Value

1                 8/36×72,000 = 16,000               16,000                           59,000

2                7/36×72,000 = 14,000               32,000                           36,000

3                6/36×72,000 = 12,000               44,000                           31,000

4                5/36×72,000 = 10,000               54,000                           21,000

5                4/36×72,000 = 8,000                 62,000                           13,000

6                3/36×72,000 = 6,000                 68,000                            7,000

7                2/36×72,000 = 4,000                 72,000                             3,000

8                1/36×72,000 =  2,000                 74,000                             1,000

Book Value = Cost - Accumulated Depreciation

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