Orange Corp. constructed a machine at a total cost of $80 million. Construction

Question

Orange Corp. constructed a machine at a total cost of $80 million. Construction was completed at the end of 2012 and the machine was placed in service at the beginning of 2013. The machine was being depreciated over a 10-year life using the sum-of-the-years'-digits method. The residual value is expected to be $6 million. At the beginning of 2016, Orange decided to change to the straight-line method. Ignoring income taxes, what will be Orange's depreciation expense for 2016? (Do not round your intermediate calculation and round final answer to 1 decimal place.)

$12.2 million.

$5.4 million.

$6.2 million.

$7.4 million.

Explanation / Answer

Sum of year digit = n(n+1)/2 = 10X(10+1)/2 = 55

Depreciation for first three years = 74 X (10+9+8)/55 = 36.33 million

Book value of the medicine = 80 - 36.33 = $43.67 milion

Depreciation for 2016 = (43.67 - 6)/7 = $5.4 million i.e. Option B

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