Question

Cutter Enterprises purchased equipment for $84,000 on January 1, 2016. The equipment is expected to have a five-year life and a residual value of $6,600. Using the sum-of-the-years'-digits method, depreciation for 2016 and book value at December 31, 2016, would be (Do not round depreciation rate per year): Multiple Choice $28,000 and $56,000. $28,000 and $49,400. $25,800 and $58,200. $25,800 and $51,600.

Answer 1

Depreciation for 2016 is $25,800

Book value at December 31, 2016 is $51,600.

Step-by-step explanation:

Given:

• Cost of equipment = $84,000
• Residual value = $6,600
• Expected life = 5 Years

Solution:

According to Sum-of-years-digit method:

Deprecation expense = Remaining life of assets x Depreciable cost /sum of the year's digits.

• Depreciable cost = $84,000 - $6,600 = $77,400
• Sum of the year's digits = 1+2+3+4+5 = 15.

Deprecation expense = 5 x ($84,000 - $6,600) / 15

Deprecation expense = 5 x $77,400 / 15

Deprecation expense = $387,000 / 15

Deprecation expense = $25,800

Book value = Depreciable cost - Deprecation expense

Book value at December 31, 2016 = $77,400 - $25,800 = $51,600