Question

 

A large profitable corporation purchased a small jet plane for use by its executives. The plane cost $3,500,000. It has a depreciable life of seven years and $0 salvage value. Develop the complete depreciation schedule for the plane showing year-by-year depreciation charges and book values, using:

(c) the DDB method with switch to SL,

(d) MACRS depreciation.

Answer 1

(c)

Swtching to Straight line method (SLM) is done in the year when DDB Annual depreciation is less than SLM Annual depreciation.

SLM Annual depreciation ($) = Cost / Useful life = 3,500,000 / 7 = 500,000

SLM Depreciation rate = 1 / Useful life = 1/7

DDB Depreciation rate = 2 x SLM rate = 2/7

Depreciation schedule is as follows.

(Values in $)
YEAR	Beginning Book Value	DB Depreciation	SL Depreciation	Switch?	Annual Depreciation	Ending Book Value
1	35,00,000	10,00,000	5,00,000	NO	10,00,000	25,00,000
2	25,00,000	7,14,286	5,00,000	NO	7,14,286	17,85,714
3	17,85,714	5,10,204	5,00,000	YES	5,00,000	12,85,714
4	12,85,714	3,67,347	5,00,000	YES	5,00,000	7,85,714
5	7,85,714	2,24,490	5,00,000	YES	5,00,000	2,85,714
6	2,85,714	81,633	5,00,000	YES	5,00,000	-2,14,286

(d) MACRS depreciation schedule (assuming 7-year property class) is as follows.

Year	Depreciation Base ($)	Depreciation rate (%)	Annual Depreciation ($)	Ending Book Value ($)
1	35,00,000	14.29	5,00,150	29,99,850
2	35,00,000	24.49	8,57,150	21,42,700
3	35,00,000	17.49	6,12,150	15,30,550
4	35,00,000	12.49	4,37,150	10,93,400
5	35,00,000	8.93	3,12,550	7,80,850
6	35,00,000	8.92	3,12,200	4,68,650
7	35,00,000	8.93	3,12,550	1,56,100
8	35,00,000	4.46	1,56,100	0