Question

Project Management

3. O'Leary Engineering Corp. has been depreciating a $50,000 machine for the last 3 years. The asset was just sold for 60% of its first cost. What is the size of the recaptured depreciation or loss at disposal using following depreciation methods. (a) Sum-of-years' digits with N = 8 and S = 2000 (b) Straight line depreciation with N = 8 and S = 2000 (c) MACRS GDS depreciation, classified as a 7-year property.

Answer 1

PARTA Applicable percentage = Number of estimated life remaining / SYD SYD = n(n+1)/2 SYD = 8(8+1)/2 = 36 Calculation of Annual Depreciation Remaining estimated useful life at beginning of year Year percentage depreciation 8/8/36 7 7/36 19.44% 66/36 55/36 4 4/36 33/36 22/36 11/36 (50,000 -2,000) 22.22% 22.22% = 10,666 (50,000 -2,000) 19.44% = 9,331 (50,000 -2,000) 16.67% 16.67% = 8,002 13.88% 11.11% 8.33% 5.55% 2.77% Total Depreciation for 3 years. = $28,000 Book Value at year 3 = $50,000 - $28,000 = $22,000 Asset sale price = $50,000 x 60% = $30,000 Gain realized on sale of Asset = $30,000 - $22,000 = $8,000 Depreciation recapture is the amount of depreciation on which tax was saved in previous years. In this case, whole realized gain of $8,000 will be considered as depreciation recapture as it is less than $22,000 (i.e. depreciation on which tax was saved)

PART B

Annual Depreciation = $50,000 - 2,000 / 8 = $6,000 per year

Depreciation for 3 years = $18,000

Book value on date of sale = $50,000 - 18,000 = $32,000

Profit / loss on sale of asset = $30,000 - $32,000 = -$2,000

PART C

Rate of Depreciation as per MACRS table :

Year 1 : 14.29%, Year 2: 24.49, Year 3: 17.49%

Depreciation for Year 1 = $50,000 x 14.29% = $7,145

Depreciation for Year 2 = $50,000 x 24.49% = 12,245

Depreciation for Year 3 = $50,000 x 17.49% x 1/2 = 8,745/2 = 43272.50

Total Depreciation = $23762.50

Net Book Value = $50,000 - $23,762 = $ 26237.50

Sale Price = $30,000

Realized gain = $30,000 - $26237.50 = $ 3762.50

Since realized gain is less than the depreciation charged in previous year, depreciation recapture is $ 3762.50

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