Question

1. A piece of office equipment is purchased for $110,000 and has an estimated salvage value of $10,000 at the end of the recovery period. Using excel, prepare a depreciation schedule for the piece of equipment using ONLY the straight line method with a recovery period of _____ years. For tax purposes, the IRS has stated this specific piece of equipment has a standard recovery period of how many years? (Fill in the blank). 2. Using excel, prepare a depreciation schedule for the piece of equipment described in #1 using ONLY the 200% declining-balance depreciation method. 3. Compare/Contrast the the two depreciation schedules defined in #1 and #2. 4. Using excel, use the 200% declining-balance depreciation switching to straight-line depreciation when the annual straight-line depreciation rate exceeds the depreciation calculated by the 200% declining-balance method for the piece of equipment described in #1.

Answer 1

1)Piece of equipment as Per IRS-Only the straight line method with a recovery period of __5___ years.

For, Tax Purpose ,The IRS has stated office Equipment has a standard recovery period of 5 Years.

Accordingly Schedules are Prepared--

Under Straight line method of depreciation - Total value of Assets -Salvage Value are divided by useful life of assets to get a equal amount of depreciation to be distributed within the period.

Here $110000-$10000=$100000 to be divided in 5 Years. $20000. As 20% equally.

DEPRECIATION SCHEDULE UNDER STRAIGHT LINE DEPRECIATION
YEAR	APPLICABLE % OF DEPRECIATION	STARTING VALUE	DEPRECIATION	END VALUE
1	20	110000	20000	90000
2	20	90000	20000	70000
3	20	70000	20000	50000
4	20	50000	20000	30000
5	20	30000	20000	10000

2. In case of 200% declining-balance depreciation - The depreciation Percentage is doubled.As here 20% So, (2x20%=40%) - Here depreciation is charged on carrying value of assets at the begginning of each Year. At last year a adjustment of depreciation is done according to salvage.

DEPRECIATION SCHEDULE UNDER 200% DECLING BALANCE DEPRECIATION
YEAR	APPLICABLE % OF DEPRECIATION	STARTING VALUE	DEPRECIATION	END VALUE
1	40	110000	44000	66000
2	40	66000	26400	39600
3	40	39600	15840	23760
4	40	23760	9504	14256
5	40	14256	4256	10000

3). Here Comparing Schedule -1 & Schedule-2 of the 2 System of depreciation We could find in the straight line the depreciation is equal and minimum initially but incase odf decling balance of depreciation initially depreciation is high though it decreses year by year. In case of long term assets straight line is useful while incase of short term/life assets it is useful to have a higher depreciation as in decling balance method as the life finishes very fast. Calculating straight line method salvage value deducted at first and the balance is divided equally. In decling balance the value of assets at the beginning of the every year is taken for the purpose of calculating depreciation.

4).As asked in Question-4, We could compare the table 1&2 and See -On the 3rd Year Straight Line Method Exceeds the depreciation rate of decling method & We have Switched to declining method - accordingly Schedule Provided -

DEPRECIATION SWITCHOVER WHILE STRAIGHT LINE DEPRECIATION INCREASES
YEAR	APPLICABLE % OF DEPRECIATION	STARTING VALUE	DEPRECIATION	END VALUE
1	20	110000	20000	90000
2	20	90000	20000	70000
3	40	70000	28000	42000
4	40	42000	16800	25200
5	40	25200	15200	10000