A naval shipyard just purchased $800,000 in capital equipment for ship repairing functions on dry-docked ships....

A naval shipyard just purchased $800,000 in capital equipment for ship repairing functions on dry-docked ships. Estimated salvage is $150,000 for any year after 5 years of use. Compare the depreciation and book value for year 3 for each of the following depreciation methods. a. MACRS where a recovery period of 10 years is allowed b. DDB with a recovery period of 15 years c. S-L as an alternative to MACRS, with a recovery period of 15 years

Expert Solution

MACRS
Year	Opening balance	Depreciation		Closing balance

1	$ 8,00,000.00	$ 80,000.00	=800000*10%	$ 7,20,000.00
2	$ 7,20,000.00	$ 1,44,000.00	=800000*18%	$ 5,76,000.00
3	$ 5,76,000.00	$ 1,15,200.00	=800000*14.4%	$ 4,60,800.00

Straight line method
Year	Opening balance	Depreciation		Closing balance
0	$ 8,00,000.00			$ 8,00,000.00
1	$ 8,00,000.00	$ 43,333.33	=(800000-150000)/15	$ 7,56,666.67
2	$ 7,56,666.67	$ 43,333.33	=(800000-150000)/15	$ 7,13,333.33
3	$ 7,13,333.33	$ 43,333.33	=(800000-150000)/15	$ 6,70,000.00

Depreciation = Investment/Life

Double declining balance
Year	Opening balance	Depreciation		Closing balance
0	$ 8,00,000.00			$ 8,00,000.00
1	$ 8,00,000.00	$ 1,06,640.00	=800000*13.33%	$ 6,93,360.00
2	$ 6,93,360.00	$ 92,424.89	=693360*13.33%	$ 6,00,935.11
3	$ 6,00,935.11	$ 80,104.65	=600935*13.33%	$ 5,20,830.46

the SLM rate = 1/15 or 6.667% so the DDB rate = 13.33%

DDB depreciation = Opening balance x depreciation rate

Amount of depreciation expense in year 3 is highest and book value at year 3 is lowest in MACRS Depreciation method.

ekkarill92 answered 3 years ago

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