Question

Some construction company has bought a product for $200,000 with a life of three years, and a salvage value of $10,000. Tabulate depreciation and book value using MACRS, Double Declining Balance and straight-line methods. Which method gives the company the largest depreciation after two years?

Answer 1

Answer:

The method that gives the company the largest depreciation after two years is MACRS.

Explanation:

According to given data Under MACS depreciation would be provided for 4 years and the salvage value of the asset would be reduced to zero .

Year  depreciation rate Deprecation          Book value at the end of the year

1 33.33%                66660 (33.33 % of 200000)        133340

2 44.45%                88900   (44.45 % of 200000) 44440

3 14.81%               29620   (14.81 % of 200000)        14820

4 7.41%               14820   (7.41 % of 200000)           0

Straight line method

The amount of depreciation remains same for three years. The depreciation amount is calculated as

=Original cost- Salvage value / life

= 200000-10000 /3

= 63333.3 $

Year Depreciation Book value at the end of the year

1         63333.33          136666.7

2         63333.33          73333.34

3         63333.33          10000.01

Double declining balance method

Under this method the depreciation is charged at double the rate of straight line method .

Depreciation rate under SLM = 100% / 3 = 33.33 %

DDB method rate = 2* 33.33% = 66.66%

Year  Book value at the beginning     Depreciation Book value at the end

1 200000                            133320 (66.66% of 200000) 66680

2 66680                          44448.89 (66.66% of 66680) 22231.11

3 22231.11                       14819.26 (66.66% of 22231.11) 7411.853

The largest depreciation is given by MACRS method after two years which is 88900