Question

If you have an asset worth 600,000 and an installation cost of 25,000 and it has been forecast that at the end of five years you will sell the asset for 18,000:

A) does the value of the asset include the installation for depreciation purposes?

B) using the straight line method what is the correct amount of annual depreciation that should be recorded in the operational cashflow? Is the salvage cost deducted first?

C) after the five years is there any capital loss or gain if the book value of the asset is 18,000 as forecast and it is sold for 18,000.

Answer 1

Requirement - (a)

“YES”. The Value of the asset includes the Installation charges also. All the costs incurred which makes the assets to usable for the purpose of business shall be included in the Value of the assets. The examples of such costs are the Asset Delivery charges, the installation costs, etc

Therefore, the Total Cost of the asset would be $625,000

Requirement - (b)

The Annual Depreciation Expenses under Straight Line Method = [Cost of the assets – Salvage Value] / Useful Life of the asset

= [$625,000 - $18,000] / 5 Years

= $607,000 / 5 Years

= $121,400 per year

“Hence, the Annual Depreciation Expenses under Straight Line Method would be $121,400 per year”

Requirement - (c)

The capital gain on sale of assets arise only if the sales value if greater than the Book value of the assets

There will be a capital loss on sale of assets if the sales value if lower than the Book value of the assets

There will not be any gain or loss if the Book Value of the asset is equals to the salvage value.

Here, the Book Value of the asset is $18,000 at the end of 5^th year which equals to the salvage value of the asset, therefore, there will not be any capital gain or loss on the sale of asset.