The Sum of the Year's Digits method
of depreciation is a way of calculating the depreciation of an asset over its
useful life. The formula for the Sum of the Year's Digits method is:
Depreciation Expense = (Cost of the Asset - Salvage Value) * (Year's Digit) / (Sum of the Year's Digits)
Where:
Cost of the Asset is the original
purchase price of the asset.
Salvage Value is the estimated value
of the asset at the end of its useful life.
Year's Digit is the number that
represents the current year of the asset's life, starting from the year of
acquisition.
Sum of the Year's Digits is the sum
of the digits from 1 to the number of years of the asset's useful life.
For example, if an asset has a cost
of $10,000 and a salvage value of $1,000, and a useful life of 5 years, the
calculation would be:
1st Year: (10000 - 1000) * 5 / (5 +
4 + 3 + 2 + 1) = $1,800
2nd Year: (10000 - 1000) * 4 / (5 +
4 + 3 + 2 + 1) = $1,440
3rd Year: (10000 - 1000) * 3 / (5 +
4 + 3 + 2 + 1) = $1,080
4th Year: (10000 - 1000) * 2 / (5 +
4 + 3 + 2 + 1) = $720
5th Year: (10000 - 1000) * 1 / (5 +
4 + 3 + 2 + 1) = $360
In this way, the total depreciation
expense over the 5 years would be $5,400, which would bring the asset's book
value to its salvage value of $1,000.
The Sum of the Year's Digits method results in a faster rate of depreciation in the earlier years of the asset's life, and a slower rate of depreciation in later years. This method is used when the asset is expected to have a higher usage or a higher earning potential in its earlier years, and a lower usage or earning potential in its later years.
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