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# How to calculate depreciation on a new machine

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Question: On January 1, 2010, Vermont Company purchased a new machine for P2,100,000. The new machine has an estimated useful life of nine years and the residual value was estimated to be P75,000. Depreciation was computed on the sum-of-the-years'-digits method. What amount should be shown in Vermont's balance sheet at December 31, 2011, net of accumulated depreciation, for this machine?

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First, we must understand the Sum-of-the-years'-digits method. This method involves determining the sum of the years of the asset's useful life. For a useful life of 9 years, the sum of the years would be 1+2+3+4+5+6+7+8+9 = 45. Next, we will look at how to calculate the depreciation: Depreciation for a particular year is calculated by taking the remaining life of the asset in years at the beginning of that year, dividing it by the sum of the years' digits and then multiplying it by the depreciable amount (Cost of asset – Salvage value). Cost of the machine = P2,100,000 Salvage value = P75,000 Depreciable amount = P2,100,000 - P75,000 = P2,025,000 Depreciation for the first year (2010): (9/45) * P2,025,000 = P405,000 Depreciation for the second year (2011): (8/45) * P2,025,000 = P360,000 Accumulated depreciation at the end of 2011 = P405,000 (2010) + P360,000 (2011) = P765,000 The net book value of the machine at December 31, 2011, would be the cost of the machine minus the accumulated depreciation. Net book value = P2,100,000 - P765,000 = P1,335,000 So, the amount to be shown in Vermont's balance sheet at December 31, 2011, net of accumulated depreciation, for this machine is P1,335,000.

Nov. 12, 2023, 3:39 a.m.

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