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If machine hours are selected as a method of depreciation, which of the following statements is...

If machine hours are selected as a method of depreciation, which of the following statements is true? A. ADS applied, B. MACRS applies, C. Salvage value in excess of 10% of cost must reduce the depreciable basis. D. Salvage value is always disregarded

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Ans D SALVAGE VALUE IS ALWAYS DISREGARDED

Under this method, hourly rate of depreciation is calculated. The cost of the asset (less residual value if any) is divided by the estimated working hours. The actual depreciate for any given period depends upon the working hours during that year.

Depreciation per hour = Original cost of machine – Scrap Value, if any/ Estimated life of the machine in hours.

The special feature is that the life of the machine is found out not in years but in hours.

MACRS, or Modified Accelerated Cost Recovery System, is currently the method the IRS has approved for companies wanting to accelerate depreciation on business equipment. MACRS includes an asset classification system which shows the number of years of depreciation for each type of asset.

MACRS includes two depreciation systems, the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). These two systems provide different methods and recovery periods for calculating depreciation deductions.

Businesses generally use the General Depreciation System unless they are required to use the Alternative Depreciation System.

The General Depreciation System uses what's called a "declining balance" system of applying depreciation each year. That is, depreciation expense each year is based on the initial cost minus accumulated depreciation from all previous years.

How Does Alternative Depreciation Work?

The ADS system sets depreciation as an equal amount each year, except for the first and last year (because they might not be a full twelve months).

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