Question

3) (20 pts.) A company bought a machine for $60,000. It was expected to last 5 years and has no salvage value. At the end of the fourth vear the machine is declared obsolete and is donated to a school. What is the loss to the company if the following depreciation method was used? a) Straight Line b) SOYD c) 5-year MACRS d) Double Declining Balance

Answer 1

a)

Straight line

First Cost of machine=FC=$60000

Salvage value=S=0

Useful life=n=5

Depreciation per year=D=(FC-S)/n=(60000-0)/5=$12000

Book Value after 4th year=FC-4*D=60000-4*12000=$12000

So, Loss to company=Book Value at the end of year 4=$12000

b)

SOYD

Sum of year digits=1+2+3+4+5=15

Total depreciation in 4 years=[(5/15)+(4/15)+(3/15)+(2/15)]*(FC-S)=(14/15)*(60000-0)=$56000

Book Value after 4th year=FC-Total Depreciation=60000-56000=$4000

So, Loss to company=Book Value at the end of year 4=$4000

c)

MACRS in 5-year class is given by

Year	Depreciation
1	20%
2	32%
3	19.20%
4	11.52%
5	11.52%
6	5.76%

Total Depreciation in 4 years=20%+32%+19.20%+11.52%=82.72%

Book value at the end of year 4=FC*(1-Total Depreciation)=60000*(1-82.72%)=$10368

So, Loss to company=Book Value at the end of year 4=$10368

d)

Double declining balance

In this case Depreciation rate=200%/5=40%

Book Value after 4th year=FC(1-40%)^4=60000*(1-40%)^4=$7776

So, Loss to company=Book Value at the end of year 4=$7776