An asset for drilling was purchased and placed in service by a petroleum product

Question

An asset for drilling was purchased and placed in service by a petroleum production company. Its cost basis is $60,000, and it has an estimated MV of $14,000 at the end of an estimated useful life of 11 years. Compute the depreciation amount in the second year and the BV at the end of the fourth year of life by each of these methods: a. The SL method. b. The 200% DB method with switchover to SL. c. The GDS d. The ADS Click the icon to view the partial listing of depreciable assets used in business Click the icon to view the GDS Recovery Rates (

Explanation / Answer

Cost of the drilling machine = $60,000

Estimated life = 11 year

Salvage value = $14,000

a. Straight Line Method (SLM):

Formula = (Cost of the asset - Salvage value) / Estimated life of the asset

Annual depreciation under SLM = ($60,000 - $14,000) / 11 years = $4,181.8 per annum.

Depreciation for the 2nd year = $4,181.8 (annual depreciation is same for every year)

Book value (BV) at the end of 4th year = $60,000 - ($4,181.8 X 4 years) = $43,272.8

b. 200% Double declining balance method - DDBM:

Depreciation under (DDBM) = 2 × Straight-line depreciation rate × Book value at the beginning of the year

Straight line depreciation rate (SLM rate) = Annual depreciation under SLM / Cost of the asset net of salvage value

= $4,182 / ($60,000 - $14,000)

= 0.091 or 9.1%

$10,920

($60,000 X 2 X 9.1%)

$8933

($49,080 X 2 X 9.1%)

$7,307

($40,147 X 2 X 9.1%)

$5,977

($32,840 X 2 X 9.1%

Therefore depreciation for the second year under DDBM = $8,933

Book value (BV) at the end of 4th year = $26,863

c. Depreciation under General Depreciation System (GDS)

A general depreciation system uses the declining-balance method to depreciate the asset.

The declining-balance method involves applying the depreciation rate against the non-depreciated balance.

As per MACRS property classes table, GDS calss life is 5 years

Depreciation rate = Annual depreciation under SLM / Cost of the asset net of salvage value

Annual depreciation = ($60,000 - $14,000) / 5 years = $9,200

Therefore Depreciaion rate = $9,200 / $46,000

= 0.2 or 20 %

Book value

(at the beginning of the year)

Book value net of depreciation

(Year end)

$12,000

($60,000 X 20%)

$9,600

($48,000X 20%)

$7,680

($38,400 X 20%)

$6,144

($30,720 X 20%)

Therefore depreciation for the second year under DDBM = $9,600

Book value (BV) at the end of 4th year = $24,576

d. Depreciation under Alternative Depreciation System (ADS):

As per MACRS property classes table, GDS calss life is 7.5 years

Year Net book value (NBV) (At the beginning of the year) Depreciation = Beginning NBV X 2 X SLM rate Net book value (Year end) 1 $60,000

$10,920

($60,000 X 2 X 9.1%)

$49,080 2 $49,080

$8933

($49,080 X 2 X 9.1%)

$40,147 3 $40,147

$7,307

($40,147 X 2 X 9.1%)

$32,840 4 $32,840

$5,977

($32,840 X 2 X 9.1%

$26,863

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