4. Four years ago, Warrior Auto Service purchased some new equipment at a cost o

Question

4. Four years ago, Warrior Auto Service purchased some new equipment at a cost of $75,000. The equipment has since been depreciated annually using the SOYD method, assuming a life of seven years and a salvage value of $5,000. Due to competitive pressures, the company has now decided to replace the equipment with a more modern alternative. A used equipment dealer has offered to purchase the current equipment for $15,000. How does this offer compare with the current book value of the equipment?

, be sure to include complete depreciation schedules showing year-by-year depreciation amounts and book values.

Explanation / Answer

SOYD method of Depreciation=

Cost of equipment =$ 75000 useful life of the equipment =7 years salvage value =$ 5000   

and Current equipment cost =$ 15000

the digits in the years of equipment useful life are summed :1+2+3+4+5+6+7=28

the quipment cost is $ 75000 and its salvage value =$ 5000

so $ 70000 is to be depreciated over the 7 years life of equipment.

so Frist year depreciation=(70000*7/28)=17500

Second year depreciation=(70000*6/28)=15000

Third year depreciation=(70000*5/28)=12500

Fourth year depreciation=(70000*/4/28)=10000

Fifth year depreciation=(70000*3/28)=7500

Sixth year depreciation=(70000*2/28)=5000

Seventh year depreciation=(70000*1/28)=2500

At end of Fourth year as the company decided to replace the equipment with new euipment

offer price of the equipment after 4 years is $ 15000

and the book value of the equipment after 4 years= 17500+15000+12500+10000=55000

the original value -accumulated depreciation= 75000-55000=20000

so the book value is $ 20000 and the offer price is $ 15000

so there is $ 5000 loss on the equipment   

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