ABC purchased a computer that cost $60,000 on March 31. 2014. This computer had

Question

ABC purchased a computer that cost $60,000 on March 31. 2014. This computer had an estimated useful life of six years and a salvage value of $6,000. ABC determines depreciation expense based upon the sum-of-years5 digits method (round all numbers to the nearest whole number and all percentages to the nearest 2 decimal places). On December 31, 2015. the old computer is exchanged for a similar computer with a fair market value of $40,000. Assume this transaction lacks commercial substance. Determine the recognized gain1 loss on the trade (if any) assuming each of the following independent scenarios:

Explanation / Answer

In the above formula, depreciable base is the difference between cost and salvage value of the asset and sum of the years' digits is the sum of the series:

1, 2, 3, ... , n ; where n is the useful life of the asset in years.

Sum of the years' digits can be calculated more conveniently using the following formula:

The second year depreciation is for full year but we have to calculate the depreciation for 9 months, thus second months depreciation * 9/12

YD Depreciation = Depreciable Base × Remaining Useful Life Sum of the Years' Digits

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