Question

At Year 0, Vermont wood manufactures Inc. purchased a light duty delivery truck for $32,000 that has a 7-year service life. The truck was place in service from Year 1. At the end of Year 7, it will be sold at a salvage value of $3000. The light duty delivery truck has been depreciated according to a 7 year MACRS property class.

1. Calculate the annual depreciation allowances over 7 years. (8 points)

2. Calculate the annual book values over 7 years. (8 points)

3. Is there a capital gains or loss and if so, how much is the gain / loss? (2 + 2 points)

Answer 1

Depreciation formula:-

Depreciation formula for an asset is as follows:

Annual Depreciation = (cost of the asset - salvage value)÷useful life of the asset

Where:

Cost of the asset is the purchase price of the asset

Salvage value is the value of the asset at the end of its useful life

Useful life of asset represents the number of periods/years in which the asset is expected to be used By the company

Ans part a)

Vermant wood manufactures purchased alight duty delivery truck for $32000 with an salvage value Of $ 3000 and a useful life of 7 years

Depreciation = $32000 - $3000 ÷ 7

= $4142.85

Therefore, the Vermat wood manufactures would depreciate the delivery truck at the amount of $4142.85 anually for 7 years

Ans part b)

Annual book value over seven years

Year	Book value (beginning	Depreciation	Book value (end)
1	$32000	$4142.85	$27,857.18
2	$27857.18	$4142.85	$23714.33
3	$23714.33	$4142.85	$19571.48
4	$19571.48	$4142.85	$15428.63
5	$15428.63	$4142.85	$11285.78
6	$11285.78	$4142.85	$7142.96
7	$7142.96	$4143.85	$3000(approx)

Ans part c)

there are no capital gains or loss Because book value of the delivery truck at the end of year 7 is the same as the salvage value.Over the useful life of an asset, the value of an asset should depreciate to it's salvage value.

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