Calculating Depreciation Expense for Hank's Tax Planning Service

Depreciation Expense Calculation

Hank’s Tax Planning Service bought computer equipment for $19,200 on January 1, 2012. It has an estimated useful life of 4 years. Hank records depreciation monthly. As of September 30, 2012, Hank has recorded total depreciation expense for this equipment of:

1. $2400
2. $3600
3. $4000
4. $14400

Answer

Correct Answer: $3600

Explanation: The computation of the depreciation expense under the Straight-line method is shown below:

= (Purchase value of computer equipment - residual value) ÷ (estimated useful life)

= ($19,200 - $0) ÷ (4 years)

= ($19,200) ÷ (4 years) = $4,800

The depreciation that is calculated above is on a yearly basis. But on a monthly basis, the depreciation should be calculated from January 1, 2012, to September 30, 2012 i.e for 9 months.

So, the depreciation would be:

= $4,800 × 9 months ÷ 12 months = $3,600

We assume the deprecation is calculated on the straight-line method.

Is it important for Hank's Tax Planning Service to accurately record depreciation expenses for their computer equipment?

Yes, it is important for Hank's Tax Planning Service to accurately record depreciation expenses for their computer equipment as it helps in proper financial reporting and tax planning for the business.