Question

Consider a 5 year MACRS depreciating asset (see page 318 in your book for the table). The initial value of the asset is $40,000 and will have a salvage value of $21,000 in three years. Find the gain or lass amount at the end of 3 years (consider a half-year convention for year 3).

		A loss of $4930
		A gain of $9480
		A gain of $5640
		A gain of $4930

Answer 1

Answer: 2^nd option

Under this method of depreciation, a 5-year property class has 6 years of recovery. The rates are 20%, 32%, 19.20%, 11.52%, 11.52%, and 5.76% respectively.

[Rates have been taken from MACRS table (half-year convention)

Up to 3 years, total recovery of depreciation is (20% + 32% + 19.20% =) 71.20%.

Depreciation recovered = Cost × Recovery rate

                                         = 40,000 × 71.20%

                                         = 28,480

Since the aggregate of depreciation and salvage value is higher than the cost, there is a gain.

Gain = (Depreciation recovered + Salvage value) – Cost

        = (28,480 + 21,000) – 40,000

         = 9,480