1. A company paid $50,000 for some research equipment, which it believes will have zero salvage value at the end of its 5-year life. Compute the depreciation schedule using each of the following methods: (a) Straight line (b) Double declining balance (c) Sum-of-years’-digits (d) 100% bonus depreciation (e) Modified accelerated cost system (MACRS); research equipment belongs to the 5-year MACRS class
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
1. A company paid $50,000 for some research equipment, which it believes will have zero salvage value at
the end of its 5-year life. Compute the depreciation schedule using each of the following methods:
(a) Straight line
(b) Double declining balance
(c) Sum-of-years’-digits
(d) 100% bonus depreciation
(e) Modified accelerated cost system (MACRS); research equipment belongs to the 5-year MACRS class
2. What is the book value of the research equipment described in Problem 1 after 3 years? Next, supposingthat the equipment is sold for $30,000 at the end of the third year, how much gain or depreciation capture is
there? Answer both questions using each of the depreciation methods listed in Problem 1.
3. Suppose that the research equipment described in Problem 1 generates net income of $24,000 over each of the five years of its life. Additionally assume that the company is subject to a combined income tax rate of
30% and that its minimum attractive
the depreciation methods listed in Problem 1. Based on your results, which depreciation method would you recommend be used? In each case, assume that the company disposes of the equipment at the end of year 5
with zero salvage value.
4. Suppose now that the research equipment as described in Problem 3 is sold at the end of year 5 for $20,000. Find the after-tax net present worth and rate of return associated with this investment assuming that the research equipment is depreciated using the method you identified as best in Problem 3.
5. Finally, suppose that now the research equipment as described in Problem 3 is sold at the end of year 5 for $70,000. Find the after-tax net present worth and rate of return associated with this investment assuming
that the research equipment is depreciated using the method you identified as best in Problem 3.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
