Question

What is the amount of depreciation, using the sum-of-the-years digits method, for the first year of use for equipment costing Rs. $9,500$, with an estimated residual value of Rs. $500$ and an estimated life of 3 years?

• A. $Rs.4,500$
• B. $Rs.3,166.67$
• C. $Rs.3,000$
• D. None of these

Answer 1

The correct option is A $Rs.4,500$

Sum of years digit method - it is variation of the "Reducing Balance Method". In this case, the annual depreciation is calculated by multiplying the original cost of the asset less its estimated scrap value by the fraction represented by formula:

n (n + 1) / 2, where,

n = estimated useful life of asset

In the given question:

n = 3,

therefore, the total of digits = [3 (3 + 1)] / 2 = 6

Cost of equipment = Rs. 9500

Scrap value = Rs. 500

The deprciation to be written off in the first year will be 3/6 of the cost of the asset less estimated scrap value

Depreciation = (3/6) * Rs. (9500 - 500)

Depreciation = Rs. 4500