XYZ Corporation bought a machine on January 1, 2011. In purchasing the machine, the company paid $50,000 cash and signed an interest-bearing note for $100,000. The estimated useful life of the machine is five years, after which time the salvage value is expected to be $15,000. Given this information, how much depreciation expense would be recorded for the year ending December 31, 2012, if the company uses the sum-of-the-years'-digits depreciation method?
A) $45,000
B) $40,000
C) $36,000
D) $34,000

Question

Quizplus · Accepted Answer

To calculate the depreciation expense using the sum-of-years'-digits method, we need to:

1. Determine the total depreciation to be taken over the useful life of the machine, which is:

Total depreciation = Cost - Salvage value
Total depreciation = $150,000 - $15,000
Total depreciation = $135,000

2. Calculate the sum-of-the-years'-digits fraction for 5 years:

Year 1: 5/15
Year 2: 4/15
Year 3: 3/15
Year 4: 2/15
Year 5: 1/15

Sum-of-the-years'-digits fraction = 5/15 + 4/15 + 3/15 + 2/15 + 1/15
Sum-of-the-years'-digits fraction = 15/15 = 1

3. Calculate the depreciation for each year by multiplying the total depreciation by the fraction for that year:

Year 1: $135,000 x 5/15 = $45,000
Year 2: $135,000 x 4/15 = $36,000
Year 3: $135,000 x 3/15 = $27,000
Year 4: $135,000 x 2/15 = $18,000
Year 5: $135,000 x 1/15 = $9,000

Therefore, the depreciation expense for the year ending December 31, 2012 (which is the end of Year 2) would be $36,000 (answer choice C).

XYZ Corporation Bought a Machine on January 1, 2011