Question

Use the information for Lockard Company given in BE11-2. (a) Compute 2017 depreciation expense using the sum-of-the-years’-digits method. (b) Compute 2017 depreciation expense using the sum-of-the-years’-digits method, assuming the machinery was purchased on April 1, 2017.

Lockard Company purchased machinery on January 1, 2017, for \(80,000. The machinery is estimated to have a salvage value of \)8,000 after a useful life of 8 years.

Short answer

1. Depreciation = $16,000
2. Depreciation = $12,000

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Depreciation

The term depreciation refers to the loss of value in assets due to abrasion and erosion over time. Companies use different methods to value their assets, but straight-line depreciation is the easiest one to apply.

(a) Computing depreciation for 2017

Calculating the sum of year digit

$\begin{array}{c}\text{Sum\hspace{0.17em}of\hspace{0.17em}year\hspace{0.17em}digit}=\frac{\text{n}(\text{n}+1)}{2}\\ =\frac{8(8+1)}{2}\\ =36\end{array}$

role="math" localid="1652950543635" $$\begin{gathered} \text{Depreciation}=\text{Cost\hspace{0.17em}of\hspace{0.17em}asset}-\text{Salvage\hspace{0.17em}value}\times \frac{\text{Number\hspace{0.17em}of\hspace{0.17em}year}}{\text{Sum\hspace{0.17em}of\hspace{0.17em}year\hspace{0.17em}digits}} \\ =\mathrm{\$}80,000-\mathrm{\$}8,000\times \frac{8}{36} \\ =\mathrm{\$}72,000\times \frac{8}{36} \\ =\mathrm{\$}16,000 \end{gathered}$$

(b) Computing depreciation for the machinery was purchased on April 1, 2017.

$$\begin{gathered} \text{Depreciation}=[(\text{Cost\hspace{0.17em}of\hspace{0.17em}asset}-\text{Salvage\hspace{0.17em}value})\times \frac{\text{Number\hspace{0.17em}of\hspace{0.17em}year}}{\text{Sum\hspace{0.17em}of\hspace{0.17em}year\hspace{0.17em}digits}}]\times \frac{\text{Number\hspace{0.17em}of\hspace{0.17em}month}}{\text{Month\hspace{0.17em}in\hspace{0.17em}year}} \\ =[(\mathrm{\$}80,000-\mathrm{\$}8,000)\times \frac{8}{36}]\times \frac{9}{12} \\ =\mathrm{\$}16,000\times \frac{9}{12} \\ =\mathrm{\$}12,000 \end{gathered}$$