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In: Accounting

A numerically controlled milling machine was pur- chased for $95,000 four years ago. The estimated salvage...

A numerically controlled milling machine was pur- chased for $95,000 four years ago. The estimated salvage value was $10,000 after 15 years. What is the machine’s book value now after 4 years of de- preciation? If the machine is sold for $20,000 early in year 5, how much of a gain on sale or recaptured depreciation is there? Assume:
(a) 7-year MACRS.
(b) Straight-line.
(c) Double-declining balance.
(d) SOYD.

Solutions

Expert Solution

a. 7 Year Macrs

Macrs 7 year depreciation rate is:

Year Rate
1 14.29
2 24.49
3 17.49
4 12.49
5 8.93
6 8.92
7 8.93
8 4.46

Depreciation during the first 4 years

Year Rate Calculation Amount
1 14.29% 95000 * 14.29% 13,576
2 24.49% 95000 * 24.49% 23,266
3 17.49% 95000 * 17.49% 16,616
4 12.49% 95000 * 12.49% 11,866
Total 65,324

Therefore, book value of machine after 4 years = 95000 - 65324 = $29,676

Since the machine is sold for $20,000

Loss on sale = 29676 - 20000 = $9,676

b) Straight Line

Depreciation in 4 years = (95000 - 10000) / 15 * 4 = $22,667

Book Value of machine after 4 years = $95000 - $22667 = $72,333

Since the machine is sold for $20,000

Loss on sale = 72333 - 20000 = $52,333

c) Double Declining Balance Method

Depreciation rate = 1 / useful life * 100 = 1/ 15 * 100 = 6.67%

Double declining depreciation rate = 2 * 6.67% = 13.33%

Depreciation in 4 years = 95000 *13.33% * 4 = $50,654

Book Value of machine after 4 years = $95000 - $50654 = $44,346

Since the machine is sold for $20,000

Loss on sale = 44,346 - 20,000 = $24,346

d) Sum of the Years Digit Method

Sum of the years =  1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 + 11 +12 +13 +14 + 15 = 120

Year Calculation Rate Amount
1 15/120*100 12.5% 11875
2 14/120 *100 11.67% 11083
3 13/120 * 100 10.83% 10292
4 12/120 * 100 10% 9500
Total 42,750

Therefore, book value of machine after 4 years = 95000 - 42750 = $52,250

Since the machine is sold for $20,000

Loss on sale = 52250 - 20000 = $32,250

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ekkarill92 answered 2 years ago
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