Orange Corp. constructed a machine at a total cost of $74 million. Construction

Question

Orange Corp. constructed a machine at a total cost of $74 million. Construction was completed at the end of 2009 and the machine was placed in service at the beginning of 2010. The machine was being depreciated over a 8-year life using the sum-of-the-years'-digits method. The residual value is expected to be $5 million. At the beginning of 2013, Orange decided to change to the straight-line method. Ignoring income taxes, what will be Orange's depreciation expense for 2013? (Do not round your intermediate calculation.)

Explanation / Answer

Cost = $ 74 Millions

Scrap Value = $ 5 Millions

Sum of Year Digits = 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 36

Un depreciated useful Year in year 2010 = 8

Depreciation Expenses in Year 2010 = 8/36 * (74 - 5) = 15.33 Millions

Un depreciated useful Year in year 2011 = 7

Depreciation Expenses in Year 2011 = 7/36 * (74 - 5) = 13.42 Millions

Un depreciated useful Year in year 2012 = 6

Depreciation Expenses in Year 2012 = 6/36 * (74 - 5) = 11.50 Millions

Total Amoount to be depreciated over the next 5 years= 74 - 15.33 - 13.42 - 11.50 = 33.75 Million

Since the method deprecition is changed to straight line method

Depreciation to be charged each year = (33.75 - 5) / 5 = 5.75 Millions

Therefore, Depreciation Expenses in 2013 = 5.75 Millions

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