Question

On January 1, 2012, Graham Company purchased a new machine for $2,800,000. The new machine has an estimated useful life of nine years and the salvage value was estimated to be $100,000.
Depreciation was computed on the sum-of-the-years'-digits method.

What amount should be shown in Graham's balance sheet at December 31, 2013, net of accumulated depreciation, for this machine?

a. $2,260,000
b. $1,780,000
c. $1,742,221
d. $1,659,000

Answer 1

Answer:

Depreciable amount = Cost - Salvage value

                                    = $2,800,000 - $100,000

                                    = $2,700,000

Year          Digits      Depreciation per annum

2012           9            9/45 x $2,700,000  = $540,000

2013            8           8/45 x $2,700,000   = $480,000

                       Accumulated depreciation =  $1,020,000

The amount to be shown in balance sheet at December  31, 2013

= Cost - Accumulated depreciation

= $2,800,000 - $1,020,000

= $1,780,000

The correct answer is B

Explanation:

In this case, we need to calculate the depreciable amount, which is cost less salvage value. Then we will calculate the depreciation for 2012 and 2013. A digit of 9 is assigned to 2012 and a digit of 8 is assigned to 2013 based on sum-of-the-year-digits method. The depreciation for 2012 is calculated as 9/45 of the depreciable amount and the depreciation for 2013 is calculated as 8/45 of the depreciable amount. The total digits for 9 years  is calculated as 1+2+3+4+5+6+7+8+9 = 45.

The amount to be disclosed in balance sheet equals cost minus accumulated depreciation for 2012  and 2013.