Use the following data to answer questions 5 through 9:
Davis Company purchased a new piece of equipment on July 1, 2014 at a cost of $1,800,000. The equipment has an estimated useful life of 5 years and an estimated salvage value of $150,000. The current year end is 12/31/15. Davis records depreciation to the nearest month.
-What is sum-of-the-years'-digits depreciation for 2015?
A) $439,998.
B) $495,000.
C) $540,000.
D) $550,000.

Question

Quizplus · Accepted Answer

To calculate sum-of-the-years'-digits depreciation, you need to first determine the total number of depreciation years, which is 5. To determine the sum-of-the-years'-digits fraction for each year, you add up the digits of the years remaining in the asset's useful life. In this case:
Year 1: 5+4+3+2+1=15
Year 2: 4+3+2+1=10
Year 3: 3+2+1=6
Year 4: 2+1=3
Year 5: 1
The sum-of-the-years'-digits fraction for each year is then calculated by dividing the years remaining in the asset's useful life by the sum of the digits. For example, the fraction for Year 1 is 5/15, or 1/3. The depreciation expense for each year is then calculated by multiplying this fraction by the depreciable cost (cost-salvage value), which in this case is $1,800,000 - $150,000 = $1,650,000.
So the sum-of-the-years'-digits depreciation for 2015 would be:
Fraction for Year 2: 4/15
Depreciation expense for Year 2: $1,650,000 x 4/15 = $440,000 (rounded to the nearest month)
Therefore, the best choice is B, $495,000, which is the sum-of-the-years'-digits depreciation for the full year of 2015.

Use the Following Data to Answer Questions 5 Through 9