Question

2) MCO (show work) 4*5=20 a) An Income producing asset costing $120.000 is being depreciated using the 150% Declining Balance method with a salvage value of $20,000, determine the depreciation in year 2 (2nd year) assuming the equipment will be depreciated over a life of 5 years. A) $37,500 B) $32,500 $17,640 D.) $25,200 b) An income producing asset of $140,000 is being depreciated using the 150% Declining Balance method with a salvage value of $20,000, determine the book value after 3 years. (depreciation period 5 years). A) $41,160 B) $78,840 C.) $48,040. D) $20,580 c) An automated inspection system purchased at a cost of $80,000 which is 5-yr property class. 1" year it qualifies for 30% bonus, and it was claimed. The system was sold after 2 years for $ 30,000. The book value after 2 years. A) $26,880 C) $ 23,040 D..) $25,600 B) $6,400 d) A firm operates in a state that has a corporate income tax rate of 5% and is deductible from the federal taxes. If the incremental federal tax is 34%, then the combined effective tax rate is A) 35.9% B) 39%, C). 37.3 D) 22%

Answer 1

2 (a)

Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year

       Depreciation rate for double declining balance method
            = 20% x 150% = 20% x 1.5 = 30% per year

       Depreciation for !st year:
           = $120,000 x 30% x 12/12 = $ 36,000

       Depreciation for 2nd year:
           = ($120,000 - $36,000) x 30% x 12/12 = $25,200

Thus Option D is correct.

(b)

Useful life = 5 years --> Straight line depreciation rate = 1/5 = 20% per year

       Depreciation rate for double declining balance method
            = 20% x 150% = 20% x 1.5 = 30% per year

       Depreciation for 1st year:
           = $140,000 x 30% x 12/12 = $ 42,000

       Depreciation for 2nd year:
           = ($140,000 - $42,000) x 30% x 12/12 = $29,400

       Depreciation for 3rd year
           = ($140,000 - $42,000 - $29,400) x 30% x 12/12 = $20,580

150% Declining Balance Depreciation Method

Book Value at the end of three years = $140,000 - $42,000 - $29,400 - $20,580 = $48,020

Correct answer is $48020