Question

Talia’s Tutus bought a new sewing machine for $70,000 that will be depreciated over 5 years using double-declining-balance depreciation with a switch to straight-line.

Required:

a. Find the depreciation charge each year.

b. If the sewing machine is sold after 2 years for $44,000, what will be the after-tax proceeds on the sale if the firm’s tax bracket is 35%?

Answer 1

Answers

a) Depreciation charge each year for sewing machine would be as below

	Year	Depreciable Cost (Opening value i..e previous closing value minus depreciation)	Percentage	Depreciation charge (Depreciable cost * Percentage
Double declining method	1	70000	40%	28000
	2	42000	40%	16800
	3	25200	40%	10080
Straight Line method	4	15120	50%(Striaght Line)	7560
	5	7560	50%(Striaght Line)	7560

Note: 1) Double declining percentage = 1/5 * 2 = 40%

2) Talia’s Tutus will switch to straight line method in year 4 when depreciation under double declining method is below straight line method i.e. if he charged Double declining depreciation in year 4 then it would have been 40% of 15120 = 6048 which is less than straight line method on balance useful life of 2 years i.e. 15120/2 = 7560.

b) If the sewing machine is sold after 2 years for $44,000 after tax proceeds will be $ 37420

Calculation:

• Book value after two years = Cost of sewing machine less depreciation for year 1 and 2
• Book value after two years =70000 - 28000 - 16800 = 25200
• Net gain on sale = 44000-25200 = 18800
• Tax on sale of Sewing machine = 18800* 35% = 6580
• Net proceeds on sale = 44000 - 6580 = 37420