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 use the Straight-Line Depreciation Method, which is the most common method for allocating the cost of an asset evenly over its useful life.
Step-by-Step Calculation:
1. Cost of one laptop: $2,300
2. Residual (salvage) value: $500
3. Useful life: 3 years
Depreciation expense per laptop per year: Depreciation=Cost−Residual ValueUseful Life=2,300−5003=1,8003=600\text{Depreciation} = \frac{\text{Cost} – \text{Residual Value}}{\text{Useful Life}} = \frac{2,300 – 500}{3} = \frac{1,800}{3} = 600
So, each laptop depreciates by $600 per year.
Now to find the annual depreciation rate as a percentage of the cost: Depreciation Rate=(Annual DepreciationCost)×100=(6002,300)×100≈26.09%\text{Depreciation Rate} = \left( \frac{\text{Annual Depreciation}}{\text{Cost}} \right) \times 100 = \left( \frac{600}{2,300} \right) \times 100 \approx 26.09\%
✅ Answer: The annual depreciation rate is approximately 26.09%.
Explanation (Approx. 300 words):
Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. It reflects the wear and tear, aging, or obsolescence of the asset as it is used in business operations. In this scenario, Herkimer & Co. has purchased seven laptops for new employees. Each laptop costs $2,300 and is expected to have a useful life of three years, after which it will have a residual value of $500.
Using the Straight-Line Depreciation Method, the depreciation expense is evenly spread across each year of the laptop’s useful life. The formula for this method is: Annual Depreciation=Cost−Residual ValueUseful Life\text{Annual Depreciation} = \frac{\text{Cost} – \text{Residual Value}}{\text{Useful Life}}
This gives us $600 per year in depreciation for each laptop. To find the annual depreciation rate as a percentage, we divide the annual depreciation by the original cost and multiply by 100. This gives approximately 26.09% per year.
This rate helps the company consistently expense the cost of the laptops, making budgeting and financial planning easier. It also ensures that financial statements reflect the declining value of the assets accurately, providing more realistic net book values. Understanding the depreciation rate is crucial for decision-making, asset replacement planning, and tax reporting.
