Question

Part 1: The Pablo Paving Company purchased a new dump truck for $125,000 at the beginning of Year 1. It is estimated that the residual value will be $15,000 and have a useful life of 5 years. Prepare a depreciation schedule using each of the 4 methods. Round %s to 2 decimal places. (Original question which I have already done, I need part 2 worked please) Part 2: If the Dump Truck is sold for $120,000 at the end of year 3, what is the gain/loss under each method? There are 4 methods of depreciation (Straight line, Sum of years digits, double depreciation, and modified acc. cost recovery.

Answer 1

Answer

Total Cost of the Truck = $125,000

Salvage Value = $15,000

Useful Life = 5 Years

Straight Line Method

Depreciation Per year = (Cost – Salvage Value) / Useful Life

= (125,000 - 15,000) / 5

= $22,000 per year

Depreciable value = Cost – Salvage Value

= 110,000 (125,000 – 15,000)

Depreciation Rate = 1 / Useful Life

1 / 5

Depreciation Rate = 20%

Depreciation = Depreciation rate * Cost

		Depreciation for the Year
Date	Asset Cost	Depreciable Cost	Depreciation Rate	Depreciation Expense	Accumulated Depreciation	Book Value
	125,000					125,000
Year 1		110,000	20%	22,000	22,000	103,000
Year 2		110,000	20%	22,000	44,000	81,000
Year 3		110,000	20%	22,000	66,000	59,000
Year 4		110,000	20%	22,000	88,000	37,000
Year 5		110,000	20%	22,000	110,000	15,000

At the Year 3 end the book value of Truck is $59,000,

Profit = Sales value – Book Value

= 120,000 - 59,000

Profit on Sale = $61,000

Sum of the Year digit Method

Depreciable Value = 110,000 (125,000 – 15,000)

Depreciation = Fraction * Depreciable Value

Year	Cost	Remaining Life of Machine	Fraction	Depreciation
Year 1	$110,000	5	5/15	36,667
2	$110,000	4	4/15	29,333
3	$110,000	3	3/15	22,000
4	$110,000	2	2/15	14,667
5	$110,000	1	1/15	7,333
Total		15

Accumulated Depreciation till Year 3 end = (36,667 + 29,333 + 22,000)

= 88,000

Book Value at Year 3 End = Cost – Accumulated Depreciation

= 125,000 – 88,000

= 37,000

At the Year 3 end the book value of Truck is $37,000

Profit = Sales value – Book Value

= 120,000 - 37,000

Profit on Sale = $83,000

Double Declining Balance

Depreciation rate = 2 * Straight line depreciation rate

= 2 * 20%

Depreciation rate = 40%

Depreciation = Book Value * Depreciation Rate

		Depreciation for the Year
Date	Asset Cost	Depreciable Cost	Book Value	Depreciation Rate	Depreciation Expense	Accumulated Depreciation
Beginning Year 1	125,000		125,000
Year 1		125,000	75,000	40%	50,000	50,000
Year 2			45,000	40%	30,000	80,000
Year 3			27,000	40%	18,000	98,000
Year 4			16,200	40%	10,800	108,800
Year 5			9,720	40%	6,480	115,280

At the Year 3 end the book value of Truck is $22,000,

Profit = Sales value – Book Value

= 120,000 - 27,000

Profit on Sale = $93,000

MACRS Method

Depreciation = Rate * Cost of Truck

Year	Asset Cost	Depreciable Cost	Depreciation Rate	Depreciation Expense	Accumulated Depreciation	Book Value
Beginning Year 1	125,000
Year 1		125,000	20.00%	25000	25000	100,000
Year 2		125,000	32.00%	40000	65000	60,000
Year 3		125,000	19.20%	24000	89000	36,000
Year 4		125,000	11.52%	14400	103400	21,600
Year 5		125,000	11.52%	14400	117800	7,200
Year 6		125,000	5.76%	7200	125000	0

At the Year 3 end the book value of Truck is $22,000,

Profit = Sales value – Book Value

= 120,000 - 36,000

Profit on Sale = $84,000