Question

On January 1, 2019, Vaughn Company, a small machine-tool manufacturer, acquired for $2,100,000 a piece of new industrial equipment. The new equipment had a useful life of 5 years, and the salvage value was estimated to be $83,700. Vaughn estimates that the new equipment can produce 16,000 machine tools in its first year. It estimates that production will decline by 2,830 units per year over the remaining useful life of the equipment.

The following depreciation methods may be used: (1) straight-line, (2) double-declining-balance, (3) sum-of-the-years’-digits, and (4) units-of-output. For tax purposes, the class life is 7 years. Use the MACRS tables for computing depreciation.

Compute accumulated depreciation by using MACRS and optional straight-line method for the 3-year period ending December 31, 2021. Ignore present value considerations.

		Accumulated Depreciation
Methods		2019		2020		2021
MACRS		$		$		$
Optional straight-line method		$		$		$

Answer 1

Step 1:- Calculate depreciation expense per straight line method

= (Cost of the asset - Salvage value)/Estimated life of the asset

= ($2,100,000 - $83,700)/5 years

=$2,016,300/5 years

=$403,260 per year.

The accumulated depreciation under Straight line method is :-

Year	Depreciation	Accumulated Depreciation
2019	403,260	403,260
2020	403,260	806,520
2021	403,260	1,209,780

Step 2:- Calculate depreciation expense per MACRS.

Year	Cost	Depreciation %	Depreciation expense	Accumulated Depreciation
2019	2100000	14.29%	300,090	300,090
2020	2100000	24.49%	514,290	814,380
2021	2100000	17.49%	367,290	1,181,670

Please note that we use the Half year convention to depreciation asset using MACRS as the company has not placed more than 40% of the assets during the last quarter of the year. Additionally, per the question, the asset class life for tax purposes is 7 years.

Step 3:- Based on the calculations above, we can summarize the data as follows:-

Methods	2019	2020	2021
MACRS	300,090	814,380	1,181,670
Optional Straight Line	403,260	806,520	1,209,780

Please let me know if you have any questions via comments. All the best :)