..
-- - .- - -- .- -- -. -- - --. -.. A _.___________
Problems 365
The MACRS system is the current tax law, and it assumes a salvage value of zero. This
, is in contrast with historical methods, which ensured the final book value would equal the
predicted salvage value. Thus, when one is using MACRS it is often necessary to consider
recaptured depreciation. This is the excess of salvage value over book value, and it is taxed
as ordinary income. Similarly, losses on sale or disposal are taxed as ordinary income.
Integrating depreciation schedules with cash flows often involves a lot of arithmetic.
Thus, the tool of spreadsheetscan be quite helpful. The functions for the historical methods,
straight line, sum of the years' digits, and declining balance, are straightforward. Rather
than individually entering MACRS percentages into the spreadsheet,the function VDB can
be used to calculate MACRS depreciation percentages.
Unit-of-production (UOP) depreciation relies on usage to quantify the loss in value.
UOP is appropriate for assets that lose value based on the number of units produced, the
tons of gravel moved, and so on (vs number of years in service). However, this method is
not considered to be acceptable for most business assets.
Depletion is the exhaustion of natural resources like minerals, oil and gas wells, and
standing timber.The owners of the natural resources are consumingtheir investmentsas the
natural resources are removed and sold. Cost depletion is computedbased on the fraction of
the resource that is removed or sold. For minerals and some oil and gas wells, an alternate
calculation called percentagedepletion is allowed.Percentagedepletion is based on income,
so the total allowable depletion deductions mayexceedthe investedcost.
PROBLEMS
11-1 A depreciable asset costs $10,000 and has an esti-
mated salvage value of $1600 at the end of its 6-year
depreciable life. Compute the depreciation schedule
for this asset by both SOYD depreciation and DDB
depreciation.
11-2 A million-dollar oil drilling rig has a 6-year deprecia-
ble life and a $75,000 salvage value at the end of that
time. Determine which one of the following methods
provides the preferred depreciation schedule: DDB
or SOYD. Show the depreciation schedule for the
preferred method.
11-3 A new machine tool is being purchased for $16,000
and is expected to have a zero salvage value at the
end of its 5-year useful life. Compute the DDB
depreciation schedule for this capital asset. Assume
any remaining depreciation is claimed in the last year.
11-4 Some special handling devices can be obtained for
$12,000. At the end of 4 years, they can be sold
for $600. Compute the depreciation schedule for the
devices using the following methods:
(a)Straight-line depreciation.
(b)Sum-of-years' -digits depreciation.
(c) Double declining balance depreciation.
(d)MACRS depreciation.
11-5 The company treasurer is uncertain which of four de-
preciation methods the firm should use for office fur-
niture that costs $50,000, and has a zero salvage value
at the end of a 1O-year depreciable life. Compute the
depreciation schedule for the office furniture using
the methods listed:
(a) Straight line.
(b) Double declining balance.
(c) Sum-of-years' -digits.
(d) Modified accelerated cost recovery system.
11-6 The RX Drug Company has just purchased a cap-
sulating machine for $76,000. The plant engineer
estimates the machine has a useful life of 5 years and
little or no salvage value. He will use zero salvage
value in the computations.
Compute the depreciation schedule for the
machine using:
(a) Straight-line depreciation.
(b) Sum-of-years'-digits depreciation.
(c) Double declining balance depreciation. Assume
any remaining depreciation is claimed in the last
year.
HI
II
-- - -- --
