Question

A loader has an initial cost of $154,000 and an estimated useful life of 8 years. The salvage value after 8 years of use is estimated to be $10,000.

a. What is the annual depreciation amount if the straight-line method of depreciation accounting is used?

b. What is the book value after 6 years if the straight-line method of depreciation accounting is used?

c. What is the annual depreciation amount in the fifth year if the sum-of-the-years method of depreciation accounting is used?

d. What is the book value at the end of the sixth year if the sum-of-the-years method of depreciation accounting is used?

e. What is the annual depreciation amount in the fourth year if the double-declining-balance method of depreciation accounting is used?

f. Assume this loader has a recovery period of 5 years in The Modified Accelerated Cost Recovery System (MACRS), list annual depreciation amount and book value for every depreciable year. (Annual depreciate rate is given in the following table)

Answer 1

a.	Annual depreciation under SLM=(Initial cost-Salvage value)/Useful life=(154000-10000)/8=$ 18000
b.	Book value after 6 years=Initial cost-Accumulated depreciation=154000-(18000*6)=$ 46000
c.	Depreciation expense under SYD method=(Initial cost-Salvage value)*(Remaining useful life of the asset/Sum of the year's digits)
	Depreciation expensefor the 5th year=(154000-10000)*(4/1+2+3+4+5+6+7+8)=144000*(4/36)=$ 16000
d.	Year	Depreciable Value	Remaining Useful life	Depreciation expense		Book value
	1	144000	8	144000*8/36=32000		112000
						(144000-32000)
	2	144000	7	144000*7/36=28000		84000
						(112000-28000)
	3	144000	6	144000*6/36=24000		60000
						(84000-24000)
	4	144000	5	144000*5/36=20000		40000
						(60000-20000)
	5	144000	4	144000*4/36=16000		24000
						(40000-16000)
	6	144000	3	144000*3/36=12000		12000
						(24000-12000)
	Book value at the end of 6th year= $ 12000
e.	Depreciation expense under double-declining balance method of depreciation=2*Staraight line rate*Book value at the beginning of the year
	Straight line rate=(1/Useful life)*100=(1/8)*100=12.5%
	Year	Book value at the beginning	Depreciation expense		Book value at the end
	1	154000	2*12.5%*154000=38500		115500
					(154000-38500)
	2	115500	2*12.5%*115500=28875		86625
					(115500-28875)
	3	86625	2*12.5%*86625=21656		64969
					(86625-21656)
	4	64969	2*12.5%*64969=16242		48727
					(64969-16242)
	Annual depreciation in 4th year= $ 16242