Question

(20 points) Mr. Jones has recently purchased 5 head of cattle (meaning, 5 cows) for $20,00o. Using MACRS depreciation, most livestock are considered to have a 5-year recovery period. Mr. Jones expects to be able to sell the cattle for $5,000 after the last depreciation period. Assuming that Mr. Jones should use a 5-year recovery period for each depreciation method, calculate the depreciation schedule (yearly depreciation amounts) using (a) the straight-line method; (b) the . double-declining balance (DDB) method, and (c) the GDS schedule

Answer 1

(a) SL method

Annual depreciation ($) = (Cost - Salvage value) / Life = (20,000 - 5,000) / 5 = 15,000 / 5 = 3,000

SL depreciation schedule is as follows.

SLM
Year	Beginning-of-year Book Value ($)	Annual Depreciation ($)	End-of-Year Book Value ($)
1	20,000	3,000	17,000
2	17,000	3,000	14,000
3	14,000	3,000	11,000
4	11,000	3,000	8,000
5	8,000	3,000	5,000

(b) DDB Method

SLM depreciation rate = 1/Useful life = 1/5 = 0.2

DDB Depreciation rate = 2 x SLM rate = 2 x 0.2 = 0.4

Depreciation schedule is as follows. This method ignores salvage value.

DDB
Year	Beginning-of-year Book Value ($)	Depreciation Rate	Annual Depreciation ($)	End-of-Year Book Value ($)
1	20,000	0.4	8,000	12,000
2	12,000	0.4	4,800	7,200
3	7,200	0.4	2,880	4,320
4	4,320	0.4	1,728	2,592
5	2,592	0.4	1,037	1,555

(c) MACRS method

This method ignores salvage value. MACRS depreciation schedule is as follows.

MACRS
Year	Depreciation Base ($)	Depreciation Rate	Annual Depreciation ($)	End-of-Year Book Value ($)
1	20,000	20	4,000	16,000
2	20,000	32	6,400	9,600
3	20,000	19.2	3,840	5,760
4	20,000	11.52	2,304	3,456
5	20,000	11.52	2,304	1,152
6	20,000	5.76	1,152	0