Question

1.

Trident Developers purchased a computer system for $100,000 on June 4, 2003. The computer system is used for business 100% of the time. The accountant for the company elected to take a $12,000 Section 179 deduction, and the asset qualified for a special depreciation allowance (see Table 17-4).

Click here for Table 17-4

a. What was the basis for depreciation of the computer system?

$

b. What was the amount of the first year's depreciation using MACRS?

Click here for Table 17-1 and Table 17-2

$

2.

Use the declining-balance method of depreciation to complete the table below. Round to the nearest hundredth of a percent when necessary.

Do not enter the percent symbol in your answer.

Useful Life (Years)	Straight-Line Rate (%)	Multiple (%)	Declining-Balance Rate (%)
3	%	200	%

3.

Use the declining-balance method of depreciation to complete the table below. Round to the nearest hundredth of a percent when necessary.

Do not enter the percent symbol in your answer.

Useful Life (Years)	Straight-Line Rate (%)	Multiple (%)	Declining-Balance Rate (%)
9	%	150	%

4.

Сompanies depreciate, or write off, the expense of tangible assets such as trucks and equipment over a period of their useful lives. Many companies also have intangible assets that must be accounted for as an expense over a period of time. Intangible assets are resources that benefit the company but do not have any physical substance. Some examples are copyrights, franchises, patents, trademarks, and leases. In accounting, intangible assets are written off in a procedure known as asset amortization. This is much like straight-line depreciation, but there is no salvage value. You are the accountant for Front Line Pharmaceuticals, Inc. In January 2000, the company purchased the patent rights for a new medication from Novae, Inc., for $8,700,000. The patent had 15 years remaining as its useful life. In January 2005, Front Line Pharmaceuticals successfully defended its right to the patent in a lawsuit that cost $500,000 in legal fees. a. Using the straight-line method, calculate the patent's annual amortization expense for the years before the lawsuit. $ b. Calculate the revised annual amortization expense for the remaining years after the lawsuit. $

Answer 1

ANSWER :

   1. The bais for depreciating the computer system was BONUS DEPRECIATION or ADDITIONAL FIRST YEAR DEPRECIATION on certain qualified assets. Section 179 of US IRC allows a taxpayer to elect to deduct the Cost of an asset as expenses rather than insisting to capitalise and depreciate. ( note : The referred table 17-4 is not visible)

2. MACRS METHOD : - MODIFIED ACCELERATED COST RECOVERY SYSTEM :

     It allows larger deduction in early years and lower deduction in later years when compared to Straight Line Method.

There are 2 subsystems of MACRS ; 1 GENERAL DEPRECIATION SYSTEM 2.ALTERNATE DEPRECIATION SYSTEM.

Asset value   = $1,00,000   date of Acquisition June 4 2003.

Table 17-1 and 17-2 are not available . So calculation is not possible.

3.

   a. Useful life 3 yrs .- Declining balance multiple 200 % DEPRECIATION :

        STRAIGHT LINE METHOD :   COST OF ASSET / USEFUL LIFE

                                                   = 1,00,000/3   = $ 33333.33

       DECLINING BALANCE          = COST OF ASSET / USEFUL LIFE * 2OO %

                                                  = $ 66666.66

   b. Useful life 9 yrs and - Declining balance Multiple 150 % - Depreciation

          Straight Line Method         = 1,00,000/9    = $ 11111.11

          Declining Balance             = 1,00,000/9 8150 %

                                                 = $ 16666.67

4. Cost of patent acquired in January 2000        = $ 8,700,000

    Remaining useful life                                    = 15 Yrs

    Legal Cost involved in Januar y2005                 = $5,00,000

Part a. Annual Amortisation Figure Before Law Suit under Straight Line Method :

                        = Cost of patent / Useful Life   = 8,700,000/15

                                                                   = $ 580,000 per year

    Part b. Annual Revised Amortisation figure afrer law suit :

             Cost of Patent in January 2000     = $8,700,000

               Amount Amortised for 5 year = 5,80,000 * 5 = 29,00,000

            Remaning Value of Patent   =( 8,700,000 - 29,00,000)

                                                        = 58,00,000

          Legal Cost incurred in 2005                               = 5,00,000

        So total cost of patetent to be amortised in balance 10 years =( 58,00,000 + 5,00,000 )

                                                                                                 = $ 63,00,000

             Amount to be Amortised per year ( Revised )       = $63,00,000/10

                                                                  = $ 6,30,000 per year.

    

                                               

              

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