Question

1. A bowling alley costs $500,000 and has a useful life of 10 years. Its estimated market value at the end of the 10^th year is $20,000. Determine the depreciation amount on the 5^th year and the book value at the end of the 8^th year using:
   1. Straight Line Method
   2. Double Declining Balance Method
   3. Sum-of-Years Digits Method
   4. Declining Balance Method with Switchover to SL
   5. MACRS GDS (assume that the assets will be disposed of on the 8^th year)

Answer 1

Answer :

(1). Straight Line Method

Asset value	500000
Salvage value	20000
Depreciation base	480000
No.of years	10
Depreciation amount for each year	480000/10 = 48000
Depreciation %	48000/480000 = 10%

Year	Depreciable Base	Depreciation %	Depreciation amount	Year end book value
1	480000	10%	48000	432000
2	480000	10%	48000	384000
3	480000	10%	48000	336000
4	480000	10%	48000	288000
5	480000	10%	48000	240000
6	480000	10%	48000	192000
7	480000	10%	48000	144000
8	480000	10%	48000	96000

Depreciation amount in 5th year	48000
Book value at end of 8th year	96000

(2). Double decline method

In double declline methhod depreciation rate is twice as the straight line method and also depreciable base and depreciation amount very year to year. Salvage value not taken to account for calculating asset value. Asset is not depreciated below its salvage value.

Asset value	500000
Salvage value	20000
Depreciable base of first year	500000
No.of years	10
Depreciation %	10%*2 = 20%

Year	Depreciable base	Depreciation %	Depreciation amount	Year end book value
1	500000	20%	100000	400000
2	400000	20%	80000	320000
3	320000	20%	64000	256000
4	256000	20%	40960	204800
5	204800	20%	40960	163840
6	163840	20%	32768	131072
7	131072	20%	26214.4	104857.6
8	104857.6	20%	20971.52	83886.08

Depreciation amount in 5th year	40960
Book value at end of 8th year	83886.08

(3). Sum of the year digit method

Under this method salvage value taken to account for calculating depreciable base. Here depreciable base same in each year. And depreciable base multiplied by a fraction that decrease each year.

Depreciation fraction = Year of useful life remaining / Sum of all years of useful life

Asset value	500000
Salvage value	20000
Depreciable base	4800000
No of years	10

Depreciation factor for 1st year = 10/55 = 0.1818

Year	Depreciable Base	Year of life remaining	Depreciation fraction	Depreciation amount	Year end book value
1	4800000	10	0.1818	87272.7	392727.3
2	4800000	9	01636	78545.5	314181.2
3	4800000	8	0.1455	69818.2	244363.6
4	4800000	7	0.1273	61090.9	183272.7
5	4800000	6	0.1091	52363.6	130909.1
6	4800000	5	0.0909	43636.4	87272.7
7	4800000	4	0.0727	34909.1	52363.6
8	4800000	3	0.0545	26181.8	26181.8

Depreciation amount in 5th year	52363.6
Book value at end of 8 th year	26181.8

(4). Declining method with switch over to S.L

Year	Depreciable base	Depreciation %	Depreciation amount	Depreciation amount under S.L method	Year end book value
1	500000	20%	100000	48000	400000
2	400000	20%	80000	48000	320000
3	320000	20%	64000	48000	256000
4	256000	20%	51200	48000	204800
5	204800	20%	48000	48000	156800
6	156800	20%	48000	48000	108800
7	108800	20%	48000	48000	60800
8	60800	20%	40800	48000	20000

Depreciation amount in 5th year	48000
Depreacition amount in 8th year	20000

(5). MACRS

This method is used for federal tax purpose. Here different rate for each year for different class asset. Here our scenatio our asset is belong to 7 year class asset. Here no salvage value is taken

Depreciation amount in 5th year	5000000*8.93% = 44650*
Book value at end of 8th year	0

Check MACRS table for class 7 asset

In year 8 asset is fully depreciated under MACRS

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