Question

A central air conditioning unit was installed at an initial cost of $65,000 and was expected to have a salvage value of $5,000 after a service life of 12 years.

a) What amount had accumulated in a straight-line depreciation reserve at the end of the 5th year?

b) Using double declining balance depreciation, determine the book value at the end of the 9th year.

c) If the equipment was sold in the 6th year for $10,000, what sunk cost would result if sum-of-the-years digit depreciation was being used?

d) Using MACRS, what is the depreciation charge on 7th year, assuming that this is a 10-year class asset?

Answer 1

a). Accumulated depreciation reserve at the end of the 5th year = (65,000-5,000)*5/12 = $25,000

b). Under double declining balance depreciation, book value at the end of the 9th year = $12,597

The following is the complete schedule under double declining balance depreciation method:

c). The sunk cost will be carrying value less salvage value realized:

Carrying amount of Asset if sum-of-the-years digit depreciation used (Refer below table) = $21,154

(Less) : Salvage Value Realized = $10,000

Sunk Cost = $11,154

The following is the complete schedule under sum-of-the-years digit depreciation method:

d). For 10 year class assets, assuming half year convention(not given), the depreciation charge on 7th year = $4,258.

The following is the depreciation table under MACRS half year convention for 10 year class asset:

Cost of Asset	65,000
Year	Rate	Depreciation
1	10.00%	6,500
2	18.00%	11,700
3	14.40%	9,360
4	11.52%	7,488
5	9.22%	5,993
6	7.37%	4,791
7	6.55%	4,258
8	6.55%	4,258
9	6.56%	4,264
10	6.55%	4,258
11	3.28%	2,132

Kindly comment if any further explanation required for any point. Thanks!