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 will use the straight-line depreciation method, which is one of the simplest and most commonly used depreciation methods.
Step 1: Calculate the Depreciable Cost per Laptop
The depreciable cost is determined by subtracting the residual value from the initial cost:
[
\text{Depreciable Cost} = \text{Initial Cost} – \text{Residual Value}
]
[
= 2,300 – 500 = 1,800
]
Step 2: Calculate Annual Depreciation Expense per Laptop
Using the straight-line method, the annual depreciation expense is calculated by dividing the depreciable cost by the useful life:
[
\text{Annual Depreciation Expense} = \frac{\text{Depreciable Cost}}{\text{Useful Life}}
]
[
= \frac{1,800}{3} = 600
]
Step 3: Calculate the Depreciation Rate
The depreciation rate is determined as a percentage of the depreciable cost over the useful life:
[
\text{Depreciation Rate} = \left(\frac{\text{Annual Depreciation Expense}}{\text{Initial Cost}}\right) \times 100
]
[
= \left(\frac{600}{2,300}\right) \times 100
]
[
= 26.09\%
]
Explanation:
The depreciation rate of 26.09% per year means that each laptop loses approximately 26.09% of its original cost in value every year over the three-year period. Since there are seven laptops, the total annual depreciation expense for all laptops would be:
[
7 \times 600 = 4,200
]
This method ensures an equal allocation of the depreciation expense over time, allowing Herkimer & Co. to systematically account for the asset’s declining value in financial records. This approach simplifies tax reporting and financial planning, as businesses can predict depreciation expenses consistently.