Question

Problem 11-4 A heavy construction firm has been awarded a contract to build a large concrete dam. It is expected that a total of 8 years will be required to complete the work. The firm will buy $600,000 worth of special equipment for the job. The salvage value of the special equipment is $60,000. The equipment utilization in year one to eight are 6000, 4000, 4000, 1600, 800, 800, 2200, and 2200 hours per year, respectively. Compute the depreciation schedules using unit-of- production and modified accelerated cost recovery system methods.

Answer 1

Units-of-Production: Under units-of-production method, asset is depreciated to its salvage value over is useful life based on quantum of units produced year-by- year. That is, depreciable value of the asset should be cost of the asset minus estimated salvage value. Cost of the asset Less: Estimated salvage value Depreciable cost Estimated units of production Depreciation per unit produced $600,000 $60,000 $540,000 21,600 $25 [6000+4000+4000+1600+800+800+2200+2200] ($540000 / 21600 units] Year Book Value Nm + n (a) (b) (a) x (b) Units Dep. Per Dep. For the produced unit year 6,000 $25 $150,000 4,000 $25 $100,000 4,000 $25 $100,000 $40,000 800 $20,000 800 $25 $20,000 2,200 $25 $55,000 2,200 $25 $55,000 1,600 $25 $25 $450,000 [$600000 - $150000] $350,000 [$450000 - $100000] $250,000 [$350000 - $100000] $210,000 [$250000 - $40000] $190,000 ($210000 - $20000] $170,000 ($190000 - $20000] $115,000 ($170000 - $55000] $60,000 ($115000 - $55000] 00

MACRS: As the asset's useful life is 8 years, it must be depreciated using the 7-year MACRS depreciation table which will depreciate the asset over 8 years using predefined depreciation % for each year. While depreciation is calculated using MACRS, asset's salvage value is not considered because as per the table, asset is always depreciated 100% to zero over MACRS depreciation years as below: Year Ovo wn 7-year MACRS Depreciation table (a) (b) (a) x (b) Dep. % Cost Dep. / Year 14.29% $600,000 $85,740 24.49% $600,000 $146,940 17.49% $600,000 $104,940 12.49% $600,000 $74,940 8.93% $600,000 $53,580 8.92% $600,000 $53,520 8.93% $600,000 $53,580 4.46% $600,000 $26,760 Book Value $514,260 ($600000 - $85740] $367,320 ($514260 - $146940] $262,380 ($367320 - $104940] $187,440 ($262380 - $74940] $133,860 ($187440 - $53580] $80,340 ($133860 - $53520] $26,760 ($80340 - $53580] $0 [$26760 - $26760]