Peron Corp. constructed a machine at a total cost of $82 million. Construction w

Question

Peron Corp. constructed a machine at a total cost of $82 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 9-year life using the sum-of-the-years'-digits method. The residual value is expected to be $7 million. At the beginning of 2013, West decided to change to the straight-line method. Ignoring income taxes, what will be Peron's depreciation expense for 2013? (Do not round your intermediate calculation.)

Explanation / Answer

Formula used in sum-of-the-years'-digits method :- ( Cost - salvage value ) * No. of years left / sum-of-the-years

Depreciation charged in 2010 = ( 82 million - 7 million ) * 9 / 45 = $ 15 million

( 45 = 9 + 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 )

Depreciation charged in 2011 = ( 82 million - 7 million ) * 8 / 45 = $ 13.33 million

Depreciation charged in 2012 = ( 82 million - 7 million ) * 7 / 45 = $ 11.67 million

Book value at the beginning of 2013 = 82 million - $ 15 million - $ 13.33 million - $ 11.67 million = 42 million

Formula used in SLM method :- ( Cost - salvage value ) / no. of years

Here no. of years = 9 years - 3 years ( since 3 years have been passed ) = 6 years

Depreciation charged in 2013 = ( 42 million - 7 million ) / 6 years = $ 5.833 million

Ignoring income taxes, what will be Peron's depreciation expense for 2013?

$ 5.833 million

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