Question

2) A company recently bought a new robot with a first cost of $240,000, and a depreciation lifetime of five years. Using a table for the Modified Accelerated Cost Recovery System, please determine the depreciation amounts and book values for years 1-6. Also, if the robot is sold at the end of year 4 for $100,000, what would be the capital gain, depreciation recapture, or capital loss?

Answer 1

Given that MACR convention is to be used. So we depreciate the asset according to the percentages known to us for an asset with a life of 5yrs as per the known schedule. The depreciation schedule is as follows for the asset with an initial book value of $240,000 --

Year	% Depreciation	Depreciation Expense	Book Value
1	20.00%	48,000.00	192,000.00
2	32.00%	76,800.00	115,200.00
3	19.20%	46,080.00	69,120.00
4	11.52%	27,648.00	41,472.00
5	11.52%	27,648.00	13,824.00
6	5.76%	13,824.00	-

All the depreciation percentages mentioned in the table above are standard values which can be found over the IRS website. Please note that depreciation is always calculated on initial book value.

Depreciation expense is the depreciation for that year. Eg. for year 1 it is calculated as (20% * 240,000) = 48,000

For year 2 depreciation expense = (32% * 240,000) = 76,800. Also the book value each year goes down by the depreciation expense for that year, so book value at year 1 = (initial book value - depreciation expense year 1) = 240,000 - 48,000 = 192,000. Similarly for year 2 book value = (book value for year 1 - depreciation expense year 2) = 192,000 - 76,800 = 115,200. Same can be extended for all.

If the robot is sold at the end of year 4, the market value = 100,000 and we can see from the depreciation schedule that the book value = 41,472.

Thus there is capital gain as market value of robot is more than the book value. The depreciation recapture is the diffence between market value and book value. Thus in this case

depreciation recapture = market value - book value = $100,000 - $41,472 = $58,528.

KINDLY NOTE THAT THIS GAIN IS TAXABLE AS PER THE GIVEN TAX RATE. So the actual gain will reduce by the tax on the profit or gain which is $58,528,