In January this year, Kathryn bought a new computer for $6000. She estimates its useful life as 5 years and its scrap value as $1500. If Kathryn uses the diminishing value method, determine the value of this computer at the end of 3 years.
To determine the value of the computer at the end of 3 years using the diminishing value method, we need to calculate the annual depreciation.
Step 1: Calculate the annual depreciation rate.
The annual depreciation rate can be calculated using the formula:
Depreciation Rate = 1 / Useful Life
In this case, the useful life of the computer is 5 years.
So, the annual depreciation rate is 1 / 5 = 0.2 or 20%.
Step 2: Calculate the depreciation expense for each year.
The depreciation expense for each year can be calculated using the formula:
Depreciation Expense = (Initial Cost - Scrap Value) * Depreciation Rate
In this case, the initial cost is $6000 and the scrap value is $1500.
So, the depreciation expense for each year is: (6000 - 1500) * 0.2 = $900.
Step 3: Calculate the value of the computer at the end of 3 years.
To calculate the value of the computer at the end of 3 years, we need to subtract the total depreciation expense of the first 3 years from the initial cost.
Total Depreciation Expense for 3 years = Depreciation Expense * Number of Years
Total Depreciation Expense for 3 years = 900 * 3 = $2700
Value of the Computer at the end of 3 years = Initial Cost - Total Depreciation Expense for 3 years
Value of the Computer at the end of 3 years = 6000 - 2700 = $3300
Therefore, the value of the computer at the end of 3 years, using the diminishing value method, is $3300.