Question

Please explain each step with number and logic.

A tractor for over-the-road hauling is purchased for $90,000. It is expected to be of use to the company for 6 years, after which it will be salvaged for $4,000. Calculate the depreciation deduction and the unrecovered investment during each year of the tractor's life using MACRS-GDS allowances. a. What is the MACRS-GDS property class? ANSWER b. Assume the tractor is used for the full 6 years ANSWER C. Assume the tractor is sold during the 4th year of use. ANSWER d. Assume the tractor is sold during the 3rd year of use.

Answer 1

Answer:

a)

MACRS-GDS is a method of calculating depreciation. Depreciation can be calculated with the help of MACRS table. Salvage value is not required while calculating depreciation by MACRS table.

Here, cost of tractor = $90,000

time period = 6 years

salvage value = $4,000.

MACRS-GDS property is classified according to its class life. These might be 3, 5, 7,10 and 15 year property class. So if a property has life of 6 years then it would come under 3 year property class.

b)

The depreciation and the unrecovered amount for an asset having value of $90,000 would be:

Depreciation = d x cost

Book value = cost-depreciation

Thus, the unrecovered investment at the end of each year is

year	depreciation rate	depreciation amount	book value
1	0.3333%	$29,997	$60,003
2	0.4445%	$40,005	$19,998
3	0.1481%	$13,329	$6,669
4	0.0741%	$6,669	$0
5	0%	$0	$0
6	0%	$0	$0

The sum of depreciation amount is $90,000.

c)

The depreciation and unrecovered amount for an asset having value of $90,000 would be for 4 years:

Depreciation = d x cost

Book value = cost-depreciation

therefore, depreciation with respect to each year=

year	depreciation rate	depreciation amount	book value
1	0.3333%	$29,997	$60,003
2	0.4445%	$40,005	$19,998
3	0.1481%	$13,329	$6,669
4	0.5%	$3,334.5=($6,992/2)	$3,334.5

d)

The depreciation for an asset having value of $ 90,000 in 3 years is calculated as

Depreciation = d x cost

Book value = cost - depreciation

therefore, depreciation with respect to each year is as follows

year	depreciation rate	depreciation amount	book value
1	0.3333%	$29,997	$60,003
2	0.4445%	$40,005	$19,998
3	0.3332%	$6,664.5=($13329/2)	$13,333.5