At the beginning of Year 1, Herkimer & Co. purchases a set of seven laptops for its new employees. Each laptop costs $2,300 and has a residual value of $500. The company expects to use the laptops for three years.
Calculate the annual depreciation rate for the group of laptops.
The correct answer and explanation is :
To calculate the annual depreciation rate for the group of laptops, we need to use the straight-line depreciation method. The straight-line method spreads the depreciation expense evenly over the useful life of the asset.
Step-by-step Calculation:
- Determine the initial cost of the laptops:
Each laptop costs $2,300, and there are seven laptops.
Total initial cost = 7 laptops × $2,300 = $16,100 - Determine the residual value of the laptops:
The residual value is the amount the company expects the laptops to be worth at the end of their useful life.
Residual value per laptop = $500
Total residual value for 7 laptops = 7 laptops × $500 = $3,500 - Calculate the total depreciation over the useful life:
Total depreciation is the difference between the initial cost and the residual value.
Total depreciation = Total initial cost − Total residual value
Total depreciation = $16,100 − $3,500 = $12,600 - Determine the useful life:
The useful life is given as 3 years. - Calculate the annual depreciation expense:
Annual depreciation = Total depreciation ÷ Useful life
Annual depreciation = $12,600 ÷ 3 years = $4,200 per year - Calculate the annual depreciation rate:
To determine the annual depreciation rate, we divide the annual depreciation by the initial cost and multiply by 100 to get the percentage.
Annual depreciation rate = (Annual depreciation ÷ Total initial cost) × 100
Annual depreciation rate = ($4,200 ÷ $16,100) × 100 ≈ 26.06%
Conclusion:
The annual depreciation rate for the group of seven laptops is approximately 26.06%.
Explanation:
The straight-line method is commonly used because it provides a consistent expense each year. By subtracting the residual value from the initial cost, we calculate how much value the laptops will lose over their useful life. Dividing this depreciation by the number of years gives us the amount to be expensed annually. This method is beneficial for budgeting and financial forecasting because it ensures that the depreciation expense remains predictable and stable throughout the life of the asset.