A file server and peripherals (MACRS-GDS 5-year property) are purchased in Decem

Question

A file server and peripherals (MACRS-GDS 5-year property) are purchased in December by a calendar-year taxpayer for $8,000. The server will be used for 6 years and be worth $200 at that time. Calculate the depreciation deduction during years 1, 3, and 6.

1. Use straight-line depreciation.

2. Use declining balance depreciation, with a rate that ensures the book value equals the salvage value.

3. Use double declining balance depreciation.

4. Use double declining balance depreciation, switching to straight line depreciation.

5. Use MACRS-GDS allowances.

Explanation / Answer

Depreciation refers to the diminution in the value of an asset due to couple of reasons like wear and tear, obsolescence, passing of time etc. There are number of methods which can be employed to derive at the depreciation amount, which include Straight Line Method, Declining Balance method, Double Declining Balance Method etc.

SLM Depreciation = (Cost – Salvage Value)/ Life of Asset

or Depreciation = (8000 – 200)/ 6 = 7800/6 = $1,300 p.a.

So as per SLM, Deprecation in all 6 years will be equal to the magnitude of $1,300 every year for 6 Years.

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