1. Janet Chin purchased a Mercedes Benz for $75,000 with a residual value of $15

Question

1. Janet Chin purchased a Mercedes Benz for $75,000 with a residual value of $15,000. The vehicle is used 75% for business and 25% for personal use. Using the straight-line depreciation method with a life expectancy of 3 years, how much could be charged each year as a business expense?

2. Ace Corporation has just purchased a Dodge Intrepid for $24,975 with a residual value of $10,500. The vehicle will be used by the information systems manager to call on stores. The vehicle is used 80% for business and the rest for personal use. Using the modified accelerated cost recovery system (MACRS), how much would Ace Corporation deduct for depreciation during the first year?

3. Ray Kunz, owner of Ray's Auto Service, purchased a Corvette convertible listed in Edmunds Buyer's Guide at $46,605 with a residual value of $24,235. Ray uses the Corvette in his business. The life expectancy is 5 years. Using the declining-balanced method, what would the depreciation expense be the first year?

4. In January 2001, Irene Baldus purchased a warehouse (nonresidential real property) in La Porte, Indiana, for $200,000. Using the Business Math Handbook, what will the allowable depreciation be each year?

5. Jim Jones Corporation is purchasing a used Pontiac Bonneville SE four-door for salesperson Chris Yontez. The Kiplinger's Buyer's Guide lists the vehicle at $22,995 with a residual value of $4,600. The life expectancy of the vehicle is 5 years. Using the declining-balance method (twice the straight-line rate), what will be the depreciation expense for the first year?

Explanation / Answer

1. Depreciation = (75000-15000)/3 = $20000

Depreciation as business expense = 20000*75% = $15000

2. The MACRS method assigns each asset a zero scrap value. If an asset should later be sold, then the sale counts as income.

Depreciation during the first year = Cost * (1/Useful Life) * A * Depreciation Convention

The asset in question belongs to 5-year class

Depreciation = 24975/5 * 20% = $999

Depreciation as business expense = 999*0.80 = $799.2

3. Depreciation rate = [(46605-24235)/5] / 46605 * 100 = 9.60%

Depreciation per annum = (Net Book Value - Residual Value) x Rate%

= (46605-24235)*9.60% = $2148

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