Question

An asset for drilling was purchased and placed in service by a petroleum production company. Its cost basis is $50,000 , and it has an estimated MV of $12,000 at the end of estimated useful life of 15 years. Compute the depreciation amount in the fourth year and the BV at the end of the fifth year of life by each of these methods:

a. The SL method.

b. The 200 % DB method with the switchover to SL.

c. The GDS.

d. The ADS.

Answer 1

Required a)

Straight Line method
End of Year	Depreciation rate	Depreciation amount	Adjusted Basis
0	0%	$                   -	$         50,000
1	6.67%	$            2,533	$         47,467
2	6.67%	$            2,533	$         44,933
3	6.67%	$            2,533	$         42,400
4	6.67%	$            2,533	$         39,867
5	6.67%	$            2,533	$         37,333

Thus,

Depreciation amount in the fourth year = $2,533

and BV at the end of fifth year = $37,333

Required b)

200% DB method with swichover to SL
End of Year	Depreciation rate for 200%DB	Depreciation amount for 200%DB	Adjusted basis for 200$ DB	Depreciation under SL	Deprciation Amount Selected	Adjusted Basis
0			$         50,000	$                   -	$                   -	$         50,000
1	13.33%	$      6,666.67	$         43,333	$            2,533	$            6,667	$         43,333
2	13.33%	$      5,777.78	$         37,556	$            2,533	$            5,778	$         37,556
3	13.33%	$      5,007.41	$         32,548	$            2,533	$            5,007	$         32,548
4	13.33%	$      4,339.75	$         28,208	$            2,533	$            4,340	$         28,208
5	13.33%	$      3,761.12	$         24,447	$            2,533	$            3,761	$         24,447

Thus,

Depreciation amount in the fourth year = $4,340

and BV at the end of fifth year = $24,447

Required c)

GDS (5year, 200% class) Half Year Convention
End of Year	Depreciation rate	Depreciation amount	Adjusted basis
0			$         50,000
1	20.00%	$         10,000	$         40,000
2	32.00%	$         12,800	$         27,200
3	19.20%	$            5,222	$         21,978
4	11.52%	$            2,532	$         19,446
5	11.52%	$            2,240	$         17,206

Thus,

Depreciation amount in the fourth year = $2,532

and BV at the end of fifth year = $17,206

Required d)

ADS (7.5years, Straight line)
End of Year	Depreciation rate	Depreciation amount	Adjusted basis
0			$         50,000
1	13.33%	$            6,667	$         43,333
2	13.33%	$            6,667	$         36,667
3	13.33%	$            6,667	$         30,000
4	13.33%	$            6,667	$         23,333
5	13.33%	$            6,667	$         16,667

Thus,

Depreciation amount in the fourth year = $6.667

and BV at the end of fifth year = $16,.667

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