Question

11-11 A $5 million oil drilling rig has a 5-year depreciable G life and a $250,000 salvage value at the end of that time. (a) Determine which one of the following meth- ods provides the preferred depreciation schedule: 100% bonus depreciation or MACRS (b) Show the depreciation schedule for the preferred method. (c) Search for new oil rig technologies and describe three that improve environmental impact.

Answer 1

Thowen. (a) The MACRS (Modified Accelerated Lost Recovery System) provides the prefferred depreciation schedule componed to 100% bonus depravate - In 100% bonus depreciations the business is allowed to deduct 100% of the cost of the property in addition to other deprivation. This may lead to loss of the business due to excess stadement . - The MACRS begins with a declining balance method and then suithes to straight line and hence the cost of the asset is depreciated over the life time. That is generally the basic point of depreciation. There are several conventions, the schedule for the second part is prepared using IRS half-year convention being used to adjust for the partial year. The first year % is determined from the declining balance depreciation rode formula Since the door declinina balance method is used we divide 200% but the who laup,

The first year's rate is exactly half of that rate. 16) Cost of oil rig Salvage value Depreciable life Dep rate = $5 million = $ 250,000|- = 5 years. = 200%. Depreciation schedule using MACRS:- Year. % luot Accumulated depot) Book value (8) 5,000,000 0.20 4,000,000 1000,000 1,600,000 2 0.32 2,400,000 0.192 1,440,000 960,ooo A 4 576,000 864,000 0.1152 288,000 5 0.1152 576,000 6 wat s 0.0576 288,000 Note : the life = The % column ofe = 5 years in (200)5]+2) is arrived by dividing the % ie, 200% by i it is half year only .. it is 0.20 year