Question

Bear’s Big Bonanza recently purchased new equipment at a cost of $1mm. What will be the DIFFERENCE in the net assets shown on the balance sheet at the end of Year 2 if the firm uses Straight-Line rather than MACRS depreciation (see table below)? Assume a 3-year life.

Year 1	Year 2	Year 3	Year 4
33.33%	44.45%	14.81%	7.41%

	A.	$157,990
	B.	$133,360
	C.	$120,987
	D.	$142,851
	E.	$111,133

Answer 1

The net asset value as per MACRS is computed as shown below:

= $ 1,000,000 - Depreciation (33.33% + 44.45%)

= $ 1,000,000 - Depreciation of 77.78%

= $ 1,000,000 - $ 777,800

= $ 222,200

The net asset value as per straight line is computed as shown below:

= $ 1,000,000 - ($ 1,000,000 / 3) x 2

= $ 1,000,000 - $ 666,666.6667

= $ 333,333.333

So, the difference is computed as follows:

= $ 333,333.333 - $ 222,200

= $ 111,133 Approximately

So, the correct answer is option E.

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