Question

9. On January 1, 2015, Smith-Jones Company purchased office furniture for $80,000. Other data on the purchase include the following: Estimated useful life 10 years MACRS life 7 years Estimated residual value $5,000 Financial statement depreciation Straight-line MACRS depreciation 200% declining balance The MACRS Depreciation table is as follows: 10 MACRS Depreciation as a Percentage of the Cost of the Asset Year of Life 3 5 7 33.33% 20.00% 14.29% 10.00% 44.45% 32.00% 24.49% 18.00% 14.81% 19.20% 17.49% 14.40% 7.41% 11.52% 12.49% 11.52% 11.52% 8.93% 9.22% 5.76% 8.92% 7.37% 8.93% 6.55% 4.46% 6.55% 6.56% 6.55% 3.28% Required: Compute the depreciation deduction for the 2015 tax return. Assume the asset is sold on April 1, 2023 for $3,000. Compute the gain/loss on disposal for both financial reporting and tax reporting.

Answer 1

Computation of Depreciation deduction for the 2015 tax return using MACRS depreciation

Year	Cost adjusted basis	Rate as per MACRS table	Depreciation	Cummulative	Book value as per tax
2015	80,000	14.29%	11,432	11,432	68,568
2016	68,568	24.49%	19,592	31,024	48,976
2017	48,976	17.49%	13,992	45,016	34,984
2018	34,984	12.49%	9,992	55,008	24,992
2019	24,992	8.93%	7,144	62,152	17,848
2020	17,848	8.92%	7,136	69,288	10,712
2021	10,712	8.93%	7,144	76,432	3,568
2022	3,568	4.46%	3,568	80,000	-

Computation of depreciation using Straight line method for financial

Year	Cost adjusted basis	Depreciation %	Depreciation	Book value as per tax
2015	80000	10	8000	72000
2016	72000	10	8000	64000
2017	64000	10	8000	56000
2018	56000	10	8000	48000
2019	48000	10	8000	40000
2020	40000	10	8000	32000
2021	32000	10	8000	24000
2022	24000	10	8000	16000
2023	16000	10	8000	8000
2024	8000	10	8000	0

1)	Since the book value as per Tax (MACRS depreciation) is nil, asset sold for $ 3000 is gain on sale.
2)	Since the book value as per SLM for financial is $ 8000 during year 2023 and if the asset is sold
	for $ 3000 there would be a loss of $ 5000