A loader has an initial cost of $154,000 and an estimated useful life of 8 years

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)

Explanation / Answer

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

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