Vasco Company purchased equipment on January 1, 2001 at a purchase price of $50,000. Vasco paid $2,500 in shipping costs on the new machine and $500 on insurance on the new machine while in transit. Vasco has determined that the sum-of-the-years digits method is the appropriate depreciation method and estimates the useful life of the equipment to be 6 years and the residual value to be $5,000. On January 1, 2003, the estimate of the useful life was changed to be a total of 10 years, and the estimate of residual value was changed to $1,000. Determine the amount of depreciation expense

The amount of depreciation expense is $3,871.86.

Explanation:

Sum-of-the-years digits method is determined by: (Remaining useful life/Sum of the years' digits) x Depreciable cost.

Depreciable cost = Cost - Salvage value

Depreciable cost = $50,000 + $2,500 - $5,000 = $47,500

Insurance premium is usually for a period of 1 year. This will be treated as prepayment instead of being added to the cost of the equipment. Shipping cost is added based on the recommendation of IAS 16 Property, Plant and Equipment.

Depreciation expense = 6/21 x $47,500 = $13,571.43 for Year 2001

Depreciation expense = 5/21 x $47,500 = $11,309.52 for Year 2002

As at December 2002, the accumulated depreciation will be $13,571.43 + $11,309.52 = $24,880.95; so, net book value is $52,500 - $24,880.95 = $27,619.05.

Change in estimate: 8/55 x $27,619.05 - $1,000 = $3,871.86.

55 = 10+9+8+7+6+5+4+3+2+1