Question

PART 1

A bowling alley costs $500,000 and has a useful life of 10 years. Its estimated market value at the end of the 10th year is $20,000. Determine the depreciation amount on the 5th year and the book value at the end of the 8th year using: a. Straight Line Method b. Double Declining Balance Method c. Sum-of-Years Digits Method d. Declining Balance Method with Switchover to SL e. MACRS GDS (assume that the assets will be disposed of on the 8th year)

*The problem should be solved manually

Answer 1

1) Straight Line Method

Asset value	500000
Salvage Value	20000
Depreciable Base	480000
No of years	10
Depreciation amount for each year(	480000/10 = 48000

Depreciation %

48000/480000 = 10%

Year	Depreciable Base	Depreciation %	Depreciation amount	Year end book value
1	480000	10%	48000	452000
2	480000	10%	48000	404000
3	480000	10%	48000	356000
4	480000	10%	48000	308000
5	480000	10%	48000	260000
6	480000	10%	48000	212000
7	480000	10%	48000	164000

8

480000

10%

48000

116000

Depreciation Amount in 5th Year	48000
Book value at end of 8th Year	116000

2) Double decline Method

In double decline method depreciation rate is twice as the Straight line method and also depreciable base and depreciation amount vary year to year. Salvage value not taken to account for calculating asset value.Asset is not depreciated below its salvage value

Asset value	500000
Salvage Value	20000
Depreciable Base for first year	500000
No of years	10

Depreciation %

10%* 2 = 20%

Year	Depreciable Base	Depreciation %	Depreciation amount	Year end book value
1	500000	20%	100000	400000
2	400000	20%	80000	320000
3	320000	20%	64000	256000
4	256000	20%	51200	204800
5	204800	20%	40960	163840
6	163840	20%	32768	131072
7	131072	20%	26214.4	104857.6
8	104857.6	20%	20971.52	83886.08

Depreciation Amount in 5th Year	40960
Book value at end of 8th Year	83886.08

3) Sum of the year digit method

Under this method salvage value taken to account for calculating depreciable base. Here depreciable base same in each year. And depreciable base multiplied by a fraction that decrease each year

Depreciation fraction = Years of Useful life Remaining / Sum of all years of useful life

Asset value	500000
Salvage Value	20000
Depreciable Base	480000
No of years	10

Depreciation Factor for 1st Year = 10/55 =.1818

Year	Depreciable Base	Year of Life remaining	depreciation fraction	Depreciation amount	Year end book value
1	480000	10	0.1818	87272.7	412727.3
2	480000	9	0.1636	78545.5	334181.8
3	480000	8	0.1455	69818.2	264363.6
4	480000	7	0.1273	61090.9	203272.7
5	480000	6	0.1091	52363.6	150909.1
6	480000	5	0.0909	43636.4	107272.7
7	480000	4	0.0727	34909.1	72363.6
8	480000	3	0.0545	26181.8	46181.8

Depreciation Amount in 5th Year	52363.6
Book value at end of 8th Year	46181.8

4) declining method with switch over to S.L

This is same as Double decline method . But when depreciation amount is going to below the straight line method depreciation amount Straight line depreciation amount will be the depreciation amount.

I upload calculation sheet image along with this you can check

On year 5 double decline method depreciation amount is less than S.L method so we take S.L depreciation amount. You can check that on 2nd option answer .and also in year 8 depreciation amount is Different because asset never go under the salvage value. thats why we adjust depreciation amount to salvage value

Depreciation Amount in 5th Year	48000
Book value at end of 8th Year	20000

5) MACRS

This method is used for federal tax purpose. Here different rate for each year for different class asset. Here our scenario our asset is belong to 7 year class asset. Here no salvage value is taken

Depreciation Amount in 5th Year	500000*8.93% = 44650*
Book value at end of 8th Year	0

* Chech MACRS table for class 7 asset

* In year 8 asset is fully depreciated under MACRS