Hugo Plc has acquired a machine for £26 000 and it cost a further £2000 to install and set up the machine for operation.It is expected to operate within normal parameters for 6 years.It will be technologically obsolete in 10 years.The expected salvage values are £1500 after 10 years and £2000 after 6 years.The benefits to be derived from the machine are expected to be greater in the early years of its life.What depreciation should be charged in each of the first two years of the equipment's life using sum-of-digits depreciation?

Question

Quizplus · Accepted Answer

The sum-of-digits method allocates more depreciation in the earlier years. The total cost is £28,000 (£26,000 + £2,000), and the salvage value after 6 years is £2,000. The depreciable amount is £26,000. The sum of the digits for 6 years is 21 (6+5+4+3+2+1). Year 1 depreciation is (6/21) * £26,000 = £7428.57, and Year 2 is (5/21) * £26,000 = £6190.48.

Hugo Plc Has Acquired a Machine for £26 000 and It