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Chapter 1 2
Depreciation
Some seed cleaning equipment was purchased in 2009 for $8,500 and is depreciated by the double declining balance (DDB) method for an expected life of 12 years. What is the book value of the equipment at the end of 20 14? Original salvage value was estimated to be $2,500 at the end of 12 years. Solution Book Value = P(1 - )n = 8,500(1 - )^6 = $2,846. This can be checked by doing the year-by-year computations: Year Depreciation 2009 (8,500-0) = $1,416. 2010 (8,500-1,416.67) = 1,180. 2011 (8,500-2,597.23) = 983. 2012 (8,500-3,581.03) = 819. 2013 (8,500-4,400.86) = 683. 2014 (8,500-5,084.05) = 569. 32 Σ of depreciation $5,653. Book Value = 8,500 - 5,653.37 = $2,846. 12 - 2 Suds-n-Dogs just purchased new automated wiener handling equipment for $12,000. The salvage value of the equipment is anticipated to be $1,200 at the end of its five-year life. Using MACRS, determine the depreciation schedule. Solution Three year class is determined. Year Depreciation 1 12,000(.3333) $3,999. 2 12,000(.4445) 5,334. 3 12,000(.1481) 1,777. 4 12,000(.0741) 889. 12 - 3
An asset will cost $1,750 when purchased this year. It is further expected to have a salvage value of $250 at the end of its five year depreciable life. Calculate complete depreciation schedules giving the depreciation charge, D(n), and end-of-year book value, B(n), for straight-line (SL), sum of the years digits (SOYD), double declining balance (DDB), and modified accelerated cost recovery (MACRS) depreciation methods. Assume a MACRS recovery period of 5 years. Solution SL SOYD DDB MACRS n D(n) B(n) D(n) B(n) D(n) B(n) D(n) B(n) 0 1,750 1,750 1,750 1,750. 1 300 1,450 500 1,250 700 1,050 350.00 1,400. 2 300 1,150 400 850 420 630 560.00 840. 3 300 850 300 550 252 378 336.00 504. 4 300 550 200 350 128 250 201.60 302. 5 300 250 100 250 0 250 201.60 100. 6 100.80 0. 12 - 4 Your company is considering the purchase of a second-hand scanning microscope at a cost of $10,500, with an estimated salvage value of $500 and a projected useful life of four years. Determine the straight-line (SL), sum of years digits (SOYD), and double declining balance (DDB) depreciation schedules. Solution Year SL SOYD DDB 1 2,500 4,000 5,250. 2 2,500 3,000 2,625. 3 2,500 2,000 1,312. 4 2,500 1,000 656. 12 - 5 A piece of machinery costs $5,000 and has an anticipated $1,000 resale value at the end of its five- year useful life. Compute the depreciation schedule for the machinery by the sum-of-years-digits method. Solution Sum-of-years-digits = (n + 1) = (6) = 15
b. $11, c. $25, d. $34, Solution Year MACRS %(FC) Depreciation 1 .2(150,000) $30, 2 .32(150,000) 48, 3 .1920(150,000) 28, 4 (.1152/2)(150,000) 8, ∑Depreciations = 30,000 + 48,000 + 28,800 + 8, = $115, BV 4 = 150,000 - 115, = $34, Recaptured depreciation = 37,500 - 34, = $2, The answer is 12 - 9 A used piece of depreciable property was bought for $20,000. If it has a useful life of 10 years and a salvage value of $5,000, how much will it be depreciated in the 9th^ year, using the 150% declining balance schedule? Solution Depreciation = = $817. Check BV at end of 8th^ year BV = = $5,449. Because the salvage value is $5,000, you can only depreciate $449.80 (5,449.80 - 5,000) in the 9th^ year. 12 - 10 A front-end loader cost $70,000 and has a depreciable salvage value of $10,000 at the end of its 5 - year useful life. Compute the depreciation schedule and book value of the tractor using MACRS depreciation. Solution Five year recovery period is determined.
Year Depreciation Book Value 1 70 ,000(.20) $14,000 70,000 - 14,000 = $56, 2 70 ,000(.32) 22,400 56,000 - 22,400 = 33, 3 70 ,000(.192) 13,440 33,600 - 13,440 = 20, 4 70 ,000(.1152) 8,064 20,160 - 8,064 = 12, 5 70 ,000(.1152) 8,064 12,096 - 8,064 = 4, 6 70 ,000(.0576) 4,032 4,032 - 4,032 = 0 12 - 11 An asset is purchased for $100,000. The asset is depreciated using MACRS depreciation and a five year recovery period. At the end of the third year of use the business changed its product mix and disposed of the asset. The depreciation allowed in the third year is nearest to a. $9, b. $16, c. $19, d. $20, Solution D 3 = .192/2(100,000) = $9, Disposal before end of MACRS recovery period results in ½-yr depreciation in disposal yr The answer is a. 12 - 12 A lumber company purchased a tract of timber for $70,000. The value of the 25,000 trees on the tract was established to be $50,000. The value of the land was established to be $20,000. In the first year of operation, the lumber company cut down 5,000 trees. What was the depletion allowance for the year? Solution For standing timber only cost depletion (not percentage depletion) is permissible. Five thousand of the trees were harvested therefore 5,000/25,000 = 0.20 of the tract was depleted. Land is not considered depletable, only the timber, which is valued at a total of $50,000. Therefore, the first year’s depletion allowance would be = 0.20($50,000) = $10,000. 12 - 13 A pump cost $1,000 and has a salvage value of $100 after a life of five years. Using the double declining balance depreciation method, determine:
Thick Trunk Sawmill purchases a new automated log planer for $95,000. The asset is depreciated using straight-line depreciation over a useful life of 10 years to a salvage value of $5,000. The book value at the end of year six is nearest to a. $9, b. $38, c. $41, d. $54, Solution Dt = (95,000 - 5,000)/ = $9,000/year ∑Depreciations = 9,000 x 6 = $54, BV 6 = 95,000 - 54, = $41, The answer is c. 12 - 16 In the production of beer, a final filtration is accomplished by the use of “Kieselguhr” or diatomaceous earth, which is composed of the fossil remains of minute aquatic algae, a few microns in diameter and composed of pure silica. A company has purchased a property for $840,000 that contains an estimated 60,000 tons. Compute the depreciation charges for the first three years, if a production (or extraction) of 3,000 tons, 5,000 tons, and 6,000 tons are planned for years 1, 2, and 3, respectively. Use the cost-depletion methods, assuming no salvage value for the property. Solution Total diatomaceous earth in property = 60,000 tons Cost of property = $480, Then, Year Tons Extracted Depreciation Charge 1 3,000 3,000 × 14 = $42, 2 4,000 4,000 × 14 = 56, 3 5,000 5,000 × 14 = 70, 12 - 17 Adventure Airlines recently purchased a new baggage crusher for $50,000. It is expected to last 14 years and has an estimated salvage value of $8,000. Determine the depreciation charge on the
crusher for the third year of its life and the book value at the end of 8 years, using SOYD depreciation. Solution SOYD depreciation for 3rd^ year Sum-of-years-digits = 3 rd-year depreciation = (P - S) = (50,000 - 8,000) = $4, Book Value at end of 8 years ∑8 years of depreciation = (50,000 - 8,000) = (42,000) = $33, Book Value = Cost - Depreciation to date = 50,000 - 33,600 = $16,
