Hugo Ltd 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 twp years of the equipment's life using sum-of-digits depreciation?

Question

Quizplus · Accepted Answer

The sum-of-the-digits method is a type of accelerated depreciation method. The total cost of the machine including installation is $28,000 ($26,000 + $2,000). With a salvage value of $2,000 after 6 years, the total depreciable amount is $26,000 ($28,000 - $2,000). The sum of the years' digits for 6 years is 21 (6+5+4+3+2+1). For the first year, the fraction is 6/21 of the depreciable amount, and for the second year, it's 5/21. Therefore, for the first year, the depreciation is $26,000 * (6/21) = $7,428.57, and for the second year, it's $26,000 * (5/21) = $6,190.48.

Hugo Ltd Has Acquired a Machine for $26 000 and It