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1 November, 06:04

Use the following method to calculate the yearly depreciation allowances and book values for a firm that has purchased $150,000 worth of office equipment that qualifies as depreciation property. The equipment is estimated to have a salvage (market) value of $30,000 (20% of the original cost) after the end of its 10-year depreciable life.

a. Straight line

b. MACRS

c. Sum-of-Years' Digits

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  1. 1 November, 06:27
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    a. Straight Line Method Depreciation = $ 2400

    b. MACRS

    c. Sum-of-Years' Digits

    Explanation:

    a. Straight Line Method Depreciation=

    Purchase Cost - Salvage Value / No of useful life * depreciation rate

    =$ 150,000 - $30,000/10 * 20%

    =120,000/10 * 20% = 12000 * 20/100=$ 2400

    b. MACRS

    Since it is a non-form 10-year property, the company can elect to use either the 150% or 200% declining balance method.

    Depreciation in 1st Year = Cost * 1/Useful Life * A * Depreciation Convention

    Depreciation in Subsequent Years =

    (Cost - Depreciation in Previous Years) * 1 / Recovery Period * A

    Where,

    A is 100% or 150% or 200%.

    Depreciation for the the first year $ 150,000/10 * 200% = $30,000

    Depreciation for the the 2nd year = $ 150,000-30,000/10 * 200% = $24,000

    Depreciation for the the third year = $ 150,000-30,000 - 24000/10 * 200%

    =$ 19,200

    Depreciation for the the 4th year $ 150,000-30,000-24000-19200/10 * 200% = Note A

    Note A: MACRS declining balance changes to straight-line method when that method provides an equal or greater deduction. Deduction under 200% declining balance MACRS for 4th year would be $ 153,600 ($150000 - $30,000 - $24000 - $19200 * 1/10 * 200%. This is greater than depreciation under straight line method.

    c. Sum-of-Years' Digits Method Depreciation

    Depreciation Amount = Acquisition Cost - Salvage Value = $ 120,000

    Sum of useful life = 10+9+8+7+6+5+4+3+2+1 = 55

    Depreciation Factor = 10/55, 9/55, 8/55, 7/55 etc.

    Depreciation for the 1st year = 10/55 * 120,000 = $ 21,818.2

    Depreciation for the 2nd year = 9/55 * 120,000 = $ 19 636.4

    Depreciation for the 3rd year = 8/55 * 120,000 = $17,546

    Depreciation for the 4th year = 7/55 * 120,000 = $ 15,273

    Depreciation for the 5th year = 6/55 * 120,000 = $ 13,091

    Depreciation for the 6th year = 5/55 * 120,000 = $ 10,909.1

    Depreciation for the 7th year = 4/55 * 120,000 = $ 8727.3

    Depreciation for the 8th year = 3/55 * 120,000 = $ 6545.5

    Depreciation for the 9th year = 2/55 * 120,000 = $4363.63

    Depreciation for the 10th year = 1/55 * 120,000 = $ 2181.81
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