A corporation will buy a set of three heavy duty trucks for 100,000 dollars. The
ID: 2475180 • Letter: A
Question
A corporation will buy a set of three heavy duty trucks for 100,000 dollars. The company will use the trucks for 10 years and expect the set of three to have a salvage value of 9000 dollars. Using the DDB method of depreciation compute the Book Value and yearly depreciation for the set of trucks for the years 3 and 8. Using the mandated MACRS tables compute the Book Value and yearly depreciation for the set of trucks for the years 2 and 9. Using the DB method such that the book value equals the salvage value after 10 years calculate the Book value and yearly depreciation for the years 4 and 7. Show all intermediate steps including as appropriate: rate used, property class and any other significant intermediate results.Explanation / Answer
(a)
Calculation of depreciation under Direct Depreciation Method (DDB):
Year
Net book value
beginning of year
DDB depreciation
Net book value
end of year
1
$ 100,000.00
$ 20,000.00
$ 80,000.00
2
$ 80,000.00
$ 16,000.00
$ 64,000.00
3
$ 64,000.00
$ 12,800.00
$ 51,200.00
4
$ 51,200.00
$ 10,240.00
$ 40,960.00
5
$ 40,960.00
$ 8,192.00
$ 32,768.00
6
$ 32,768.00
$ 6,553.60
$ 26,214.40
7
$ 26,214.40
$ 5,242.88
$ 20,971.52
8
$ 20,971.52
$ 4,194.30
$ 16,777.22
9
$ 16,777.22
$ 3,355.44
$ 13,421.77
10
$ 13,421.77
$ 3,421.77
$ 10,000.00
Depreciation and book value of trucks for 3 and 8 years are $12,800, $51,200 and $4,194.30, $16,777.22 respectively.
(b)
Compute the depreciation under the MACRS method:
Year
Net book value
beginning of year
MACRS depreciation
Net book value
end of year
1
$ 90,000
$ 9,000
$ 81,000
2
$ 81,000
$ 16,200
$ 64,800
3
$ 64,800
$ 12,960
$ 51,840
4
$ 51,840
$ 10,368
$ 41,472
5
$ 41,472
$ 8,298
$ 33,174
6
$ 33,174
$ 6,633
$ 26,541
7
$ 26,541
$ 5,895
$ 20,646
8
$ 20,646
$ 5,895
$ 14,751
9
$ 14,751
$ 5,904
$ 8,847
10
$ 8,847
$ 5,895
$ 2,952
11
$ 2,952
$ 2,952
$ 10,000
Year
Book value at end
Depreciation
2
$ 64,800
$ 16,200
9
$ 8,847
$ 5,904
(c )
Compute the depreciation under the DB method:
Straight = 1/10 = 10%
Declining balance rate = 2*10% = 20%
Book value = Cost – Accumulated deprecation
= $100,000 - $20,000
= $80,000
Depreciation = 20 % * $80,000 = $9,600 per year
Year
Net book value
beginning of year
DDB depreciation
Net book value
end of year
1
$ 100,000.00
$ 20,000.00
$ 80,000.00
2
$ 80,000.00
$ 16,000.00
$ 64,000.00
3
$ 64,000.00
$ 12,800.00
$ 51,200.00
4
$ 51,200.00
$ 10,240.00
$ 40,960.00
5
$ 40,960.00
$ 8,192.00
$ 32,768.00
6
$ 32,768.00
$ 6,553.60
$ 26,214.40
7
$ 26,214.40
$ 5,242.88
$ 20,971.52
8
$ 20,971.52
$ 4,194.30
$ 16,777.22
9
$ 16,777.22
$ 3,355.44
$ 13,421.77
10
$ 13,421.77
$ 3,421.77
$ 10,000.00
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