5 A profitable company making earthmoving equ an investment of $100,000 in a tru
ID: 2513137 • Letter: 5
Question
5 A profitable company making earthmoving equ an investment of $100,000 in a truck that will have a five-year useful life. It expects to sell the truck after five years for a salvage value of $20,000. a) Calculate the depreciation schedule using Straight-Line b) Calculate MACRS depreciation using the MACRS tables, noting c) After three years, what would be the book value of the truck using d) Recognizing that a lower book value means more depreciation has depreciation and a five-year depreciable life that the truck has a five-year useful life SL depreciation, and what would it be using MACRS Depreciation? been claimed, and depreciation results in tax savings, which would be the company's preferable depreciation method?
Explanation / Answer
Part 1)
The depreciation schedule using straight-line method is given as below:
Annual Depreciation = (Cost - Salvage Value)/Estimated Life = (100,000 - 20,000)/5 = $16,000
____
Annual Depreciation (Year 1) = $16,000
Annual Depreciation (Year 2) = $16,000
Annual Depreciation (Year 3) = $16,000
Annual Depreciation (Year 4) = $16,000
Annual Depreciation (Year 5) = $16,000
_____
Part 2)
The depreciation schedule using MACRS is prepared as below:
_____
Part 3)
The book value of truck after three years is calculated as follows:
Book Value of Truck (Straight Line Method) = Cost - Depreciation for Year 1 - Depreciation for Year 2 - Depreciation for Year 3 = 100,000 - 16,000 - 16,000 - 16,000 = $52,000
Book Value of Truck (MACRS) = Cost - Depreciation for Year 1 - Depreciation for Year 2 - Depreciation for Year 3 = 100,000 - 20,000 - 32,000 - 19,200 = $28,800
_____
Part 4)
Based on the book value, the company would select the MACRS method as it would allow the company to claim more depreciation in the initial years and thereby, generate more tax savings in the beginning years.
Year Cost [A] Depreciation Rate (MACRS) [B] Annual Depreciation [A*B] 1 100,000 20.00% 20,000 2 100,000 32.00% 32,000 3 100,000 19.20% 19,200 4 100,000 11.52% 11,520 5 100,000 11.52% 11,520Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.