Question

Talia’s Tutus bought a new sewing machine for $65,000 that will be depreciated over 5 years using double-declining-balance depreciation with a switch to straight-line.

Required: a. Find the depreciation charge each year. b. If the sewing machine is sold after 3 years for $29,000, what will be the after-tax proceeds on the sale if the firm’s tax bracket is 35%?

Answer 1

a) The double declining balance depreciation rate is twice what straight line depreciation.

Formula= 2*straigh line depreciation* Book value of asets

Straighline depreciation = Book Value of asset/useful life of asset

$65000/5= $13000 per year

in percentage = 13000/65000*100= 20%

Double declining percentage is 2*20%=40%

Hence double declining amount = 2*20%*65000= $26000

	1	2	3	4	5
Book Value of the asset at the start of each year $	65000	39000	23400	14040	7020
Double-Declining Balance Depreciation	-26000	-15600	-9360
	see text
	(65000*40%)	(39000*40%)	(23400*40%)
Book Value of the asset at the end of each year $	39000	23400	14040	7020	0
Straight Line depreciation	13000	9750	7800	7020*	7020**
	65000/5	390000/4	23400/3	14040/2	7020/1
Declining Balance switching to straight line depreciation	26000	15600	9360	7020	7020	65000(accumulated depreciation)

Please note that for the first 3 years we have calculated depreciation on the basis of double declining method in year 4 and year 5 we have used staright line depreciation as we have to write off the machine value at the end of 5 years , hence book value at the end of 3rd year is 14040 so we have calculted half of 14040 which is 7020 and write off 7020 in each year (year 4 & year 5) so that the machine value will be zero at the end of 5th year

b) Book Value at the end of 4th year = $ 7020

	$
Book Value at the end of 4th year	7020
Proceeds from sale	20000
Taxable Gain(20000-7020)	12980
Tax on gain (35%)
12980*35%	4543
Profit after tax =Sale proceeds minus Tax paid
(20000-4543)	15457