Question

Depreciation Problem: (8pts) ---- Please complete using Excel or by hand.

A machine was purchased for $92,000 and had a depreciable life of five years and a depreciable salvage value of $5,000. Using the following depreciation methods; Straight Line, Sum-OfYears’ Digits, Double Declining Balance, and MACRS(with a 5 year property class):
a. Create a depreciation schedule
The owner has been offered to sell the machine in year 2 for $50,000.  
b. Calculate if the company will see a gain or loss and how much it will be for each depreciation method

Answer 1

a.

Depreciation for the Year (Straight Line Method)
Date	Asset Cost	Depreciable Cost	Depreciation Rate	Depreciation Expense	Accumulated Depreciation	Book Value
	$         92,000					$            92,000
Year 1		$           87,000	20%	$              17,400	$            17,400	$            74,600
Year 2		$           87,000	20%	$              17,400	$            34,800	$            57,200
Year 3		$           87,000	20%	$              17,400	$            52,200	$            39,800
Year 4		$           87,000	20%	$              17,400	$            69,600	$            22,400
Year 5		$           87,000	20%	$              17,400	$            87,000	$               5,000

Depreciation for the Year (Double)
Date	Asset Cost	Depreciable Cost	Book Value	Depreciation Rate	Depreciation Expense	Accumulated Depreciation
Beginning Year 1	$          92,000		$              92,000
Year 1		$        92,000	$              55,200	40%	$           36,800	$           36,800
Year 2			$              33,120	40%	$           22,080	$           58,880
Year 3			$              19,872	40%	$           13,248	$           72,128
Year 4			$              11,923	40%	$             7,949	$           80,077
Year 5			$                7,154	40%	$             4,769	$           84,846

Sum of the year digit method
		Depreciation for the Year
Year	Asset Cost	Depreciable Cost	Remaining Life of Asset	Fraction	Depreciation Expense	Accumulated Depreciation	Book Value
	$         92,000						$       92,000
1		$           87,000	5		$            29,000	$            29,000	$       63,000
2		$           87,000	4		$            23,200	$            52,200	$       39,800
3		$           87,000	3		$            17,400	$            69,600	$       22,400
4		$           87,000	2		$            11,600	$            81,200	$       10,800
5		$           87,000	1		$               5,800	$            87,000	$          5,000
			15

MACRS Method
Year	Asset Cost	Depreciable Cost	Depreciation Rate	Depreciation Expense	Accumulated Depreciation	Book Value
Beginning Year 1	$          92,000
Year 1		$        92,000	20.00%	$             18,400	$           18,400	$           73,600
Year 2		$        92,000	32.00%	$             29,440	$           47,840	$           44,160
Year 3		$        92,000	19.20%	$             17,664	$           65,504	$           26,496
Year 4		$        92,000	11.52%	$             10,598	$           76,102	$           15,898
Year 5		$        92,000	11.52%	$             10,598	$           86,701	$             5,299
Year 6		$        92,000	5.76%	$               5,299	$           92,000	$                    -

b.

Method	Remaining Value at the end of 2nd Year (A)	Selling Price of the Machine (B)	Gain/Loss (A-B)
Straight Line Method	$                   57,200	$        50,000	$    (7,200)
Double Declining Method	$                   58,880	$        50,000	$   (8,880)
Sum of year digit Method	$                   39,800	$        50,000	$    10,200
MACRS Method	$                   44,160	$        50,000	$       5,840