Engle hard purchases a slurry based separator for the mining of clay that costs

Question

Engle hard purchases a slurry based separator for the mining of clay that costs $700,000 and has an estimated useful life od 10 years, a MACRS-GDS property class of 7 years and an estimated salvage value of $75000 after 10 years. It was financed using a $200,000 down payment and a loan of $500,000 over a period of 5 years with interest at 10%. Loan payments are made in equal amounts over the five years. What is the amount of the MACRS-GDS depreciation taken in the third year if the separator is also sold during the third year?

Explanation / Answer

Total cost of MACRS-GDS = $200000 (downpayment) + $805255 [Loan (including interest) for 5 years]

[(Cost – Salvage)/Recover Period ] = Normal depreciation ---------------------------A)

Total Machine cost (1st year)= Mining clay cost+ MACRS cost

$700000+200000+161051 ($805255 divide over 5 years) = $1061051

so using depreciation formula (equation A) we have depreciation for the first year

(1061051-75000)/10 = $98605.1= depreciation over 10 years.

now using sum of years' digits we can calculate the depreciation-

1+2+3+4+5+6+7+8+9+10= 55

so for 1st year depreciation = 10/55 *(98605.1)= 17928.2

for 2nd year depr. = 9/55*(98605.1) = 16135.38

for 3rd year depr. = 8/55 *(98605.1)= 14342.56 ------------------ Answer.

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