Seven Star Corporation purchased a piece of equipment at the beginning of 2012.

Question

Seven Star Corporation purchased a piece of equipment at the beginning of 2012. The equipment cost $140,000. Its estimated service life is 8 years and has an expected salvage value of $8,000. The sum-of-the-years-digits method is used. The depreciation schedule has a $22,000 annual depreciation expense for a certain year.

Required: Determine what year the depreciation expense of $22,000 is on the depreciation schedule. Round all answers to the nearest whole dollar.

NOTE: Be sure to show all your calculations. This has the possibility of partial credit. Incorrect answers without calculations will automatically result in zero points.

Explanation / Answer

Sum-of-years-digits = 1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 = 36

Depreciable base = Cost - salvage value = $(140,000 - 8,000) = $132,000

Annual depreciation in year N = $132,000 x Depreciation Factor

So, annual depreciation = $22,000 in Year 3.

Year Book Value ($) Depreciation Factor Annual Depreciation ($) (1) (2) (3) (4) = (2) x(3) 1 1,32,000 8/36 29,333 2 1,32,000 7/36 25,667 3 1,32,000 6/36 22,000 4 1,32,000 5/36 18,333 5 1,32,000 4/36 14,667 6 1,32,000 3/36 11,000 7 1,32,000 2/36 7,333 8 1,32,000 1/36 3,667

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