Question

please solve and show your work for problem 6.6.
there is an effective incremental income tax rate of 40%

depreciation fail to cover the actual depreciation? 66. An asset for drilling that was purchased by a petroleum company in 1996 had a first cost of $60,000 and an estimated salvage value of S12,000. The ADR guideline period for useful life is taken from IRS Publication 534 (Table 6-2), and the MACRS recovery period is 7 years. Compute the depreciation amount in the third year and the BV at the end of the fifth year of life by each of these methods: a the straight-line method over useful (ADR) life; b. the SYD method over useful (ADR) life: c, the 200% declining balance method (with R-2/N) over useful (ADR) life; d. the MACRS method, using rates from Table 6-4. 67. By each of the following methods, calculate the BV of a highpost binding machine at the

Answer 1

a) straight line method
depreciation amount = (Cost of asset - salvage value) / depriciable life
= (60000 - 12000)/ 3
= 48000/3
= $16000

BV at the end of fifth year = asset cost - (accumulated depreciation through year )

= 60000 - 60000 (at the end of 5^th year accumulated depreciation amount would be 60000)

= 0.

b) SYD method

depreciation amount = (N - t + 1) (asset cost basis - salvage value) / sum-of-years-digits (N = total no. of years & t = depreciable years)
= (5-3+1) (48000) / (1+2+3+4+5)
= 3 X 48000 / 15
= $9600

BV at the end of fifth year = asset cost - (accumulated depreciation through year )
= 60000 - 48000 (accumulated depreciation through year = 16000 + 12800 + 9600 + 6400 + 3200)
= $ 12000

c) 200% declining balance method

depreciation amount =  (2/N) X {asset cost - (accumulated depreciation through year )}

for 1st year = (2/5) X (60000 - 0)
= 2 X 12000
= 24000
for 2nd year = (2/5) X (60000 - 12000)
= 2 X 9600
= 19200
for 3rd year = (2/5) X (60000 - 43200)
= 2 X 3360
= 6720

In this method it doesn’t always use assets salvage value while computing the depreciation, however, depreciation ends once the estimated salvage value of the asset is reached.

BV at the end of fifth year = technically not possible as the depriciation reaches the salvage value in three years.

4) MACRS method =
Annual Depreciation Rate=200%/7=28.5714%
depreciation amount =
    for 1st year = 60000 X 28.5714%
= 17143
book value = 60000 -17143 = 42857

for 2nd year = 42857 X 28.5714%
= 12244

book value = 60000 - 17143 - 12244 = 30613

for 3rd yeart = 30613 X 28.5714%
= 8747

book value = 60000 - 17143 - 12244 -8747 = 21866

for 4th year = 21866 X 28.5714%
= 6247

book value = 60000 - 17143 - 12244 - 8747 - 6247 = 15619

for 5th year = 15619 X 28.5714%
= 4463

book value = 60000 - 17143 - 12244 - 8747 - 6247 - 4463. = 11156.