Question

A purchased machine cost $320,000 with delivery and installation charges amounting to $30,000. The declared salvage value was $50,000. Early in Year 3, the company changed its product mix and found that it no longer needed the machine. One of its com- petitors agreed to buy the machine for $180,000. Determine the loss, gain, or recapture of MACRS depreciation on the sale. The ADR is 12 years for this machine.

Answer 1

Solution:

Given

purchased machine cost $320,000

delivery and installation charges amounting to $30,000.

salvage value was $50,000.

In Year 3, the company changed its product mix and found that it no longer needed the machine.

buy the machine for $180,000

ADR is 12 years

Calculation of Gain or Loss on sale of machine in year 3 is:

Total cost of the machine = purchase price of machine + installation cost

= $320,000+$30,000

= $350,000

In MACRS depreciation calculation, Salvage value is not considered.

Since the machine is discarded in the 3rd year, Depreciation on machine is calculated for 3 years only:

Year 1: $350,000 * 1/12 * 200% *0.5 = $29,166.67

Ending value at the end of year 1 = $350,000 - $29,166.67 = $320,833.33

Year 2: 320,833.33*1/11*200% = $58,333.33

Ending Value at the end of year 2 = $320,833.33 - $58,333.33 = $262,500

Year 3: 262500 * 1/10 * 200% = $52,500

Ending value at the end of year 3 = $262,500- $52,500 = $210,000

Year 4: $210,000 *1/9 *200% = $46,667

Ending Value at the end of year 4 = $210,000 - $46,667 = $163,333

Given,

the beginning value of the asset was the ending value at the end of year 3, = $210,000

And beginning in year 4 it was sold at $180,000.

Hence there was a loss in the sale of machine to one of its competitors.

Loss = $180,000 - $210,000

= - $30,000