Question

Task 6 (15 marks): An asset costs €5,000 and is expected to be used for 5 years with a residual

value of €500. Calculate the depreciation that is to be charged to the Income statement in each of the
five years by the sum of digits method. Use the table for solution:
Year
Year 1
Year 2
Year 3
Year 4
Year 5
The Balance Sheet
at the beginning of
the year
€5,000
Depreciation
Expenses per year
Method Sum of years
Accumulated
Depreciation
The Balance Sheet at the
end of the year

Answer 1

The sum of digits method is used to calculate the depreciation expenses for each year based on the digits of the asset's expected useful life. In this case, the depreciation expenses for each year would be €1,500, €1,200, €900, €600, and €300.

Step-by-step explanation:

The sum of digits method is a depreciation method that allocates depreciation expenses based on the digits of each year’s expected useful life. To calculate the annual depreciation expense, follow these steps:

Add up the digits of the asset's expected useful life. In this case, 5 + 4 + 3 + 2 + 1 = 15.

Calculate the fraction for each year by dividing the remaining useful life by the sum of digits. For example, in Year 1, the fraction would be 5/15, in Year 2 it would be 4/15, and so on.

Multiply the fraction for each year by the depreciable cost, which is the cost of the asset minus its residual value. In this case, the depreciable cost is €5,000 - €500 = €4,500.

The depreciation expense for each year would be as follows:
Year 1: (5/15) * €4,500 = €1,500
Year 2: (4/15) * €4,500 = €1,200
Year 3: (3/15) * €4,500 = €900
Year 4: (2/15) * €4,500 = €600
Year 5: (1/15) * €4,500 = €300