Deck 12: Depreciation Methods

Question 1

How does depreciation affect income taxes

Answer 1

Most of the assets lose their value with time, mostly because of wear and tear, which reduces its working life and productivity. Depreciation is an accounting method which help owner record the loss of value of asset in their statements.
Depreciation is treated as expense in book of accounts. The profit of any firm decreases when there is increase in expenses. Depreciation is not an actual expense made but just an entry, so even though the profit is high but as per book of accounts profit decreases. Now, the tax is calculated on net profit, with reduced profit, tax liability of businesses also decreases. Therefore, depreciation helps in reducing income taxes.

Question 2

What are three depreciable costs that are included in an asset's basis

Answer 2

Most of the assets lose their value with time, mostly because of wear and tear, which reduces its working life and productivity. Depreciation is an accounting method which help owner record the loss of value of asset in their statements.
Three depreciable costs that are included in asset basis are as follows:
• The cost of the asset itself.
• The cost of installation of the asset.
• The cost of delivery of the asset to the desired location.

Question 3

What is the difference between book value and market value

Answer 3

Most of the assets lose their value with time, mostly because of wear and tear, which reduces its working life and productivity. Depreciation is an accounting method which help owner record the loss of value of asset in their statements.
The difference between the book value and market value of the asset is that market value is actual value that the owner will receive when he sells the asset into the market, while the book value is the remaining undepreciated value left after deducting the previous years' depreciation from the cost basis. In most of the cases the market value and book value are totally different. Another difference is that book value always decreases year after year for every asset, but for some assets market value increases with time like property, etc.

Question 4

There are 3 different life values (recovery periods) sociated with a depreciable asset. Identify each by name and explain how it is correctly used.

Question 5

Cyber Manufacturing is purchasing a complete video borescope system for applications that require work in places that eyes cannot see. The purchase price is $8000, shipping and delivery is $300, installation cost is $1200, tax recovery period is 5 years, book depreciation period is 10 years, salvage value is estimated to be $500, operating cost (with technician) ll be $45,000 per year. For MACRS depreciation of the system, what are the values of B , S , and n

Question 6

Jobe Concrete Products placed a new sand sifter into productioN₃ years ago. It had an installed cost of $100,000, a life of 5 years, and an anticipated salvage of $20,000. Book depreciation charges for the 3 years are $40,000, $24,000, and $14,000, respectively. ( a ) termine the book value after 2 years. ( b ) the sifter's market value today is $20,000, determine the difference between its current book value and its market value, and state which is lower. ( c ) termine the total percentage of installed cost written off through year 3.

Question 7

Quantum Electronic Services paid P = $40,000 for its networked computer system. Both tax and book depreciation accounts are maintained. The annual tax depreciation rate is based on the previous year's book value (BV), while the book depreciation rate is based on the original first cost (P). Use the rates listed to plot annual depreciation and book values for each method. Develop the graphs using hand calculations or a spreadsheet, as directed by your instructor.

Question 8

A company that manufactures pulse Doppler insertion flow meters uses the straight line method for book depreciation purposes. Newly acquired equipment has a first cost of $170,000 with a 3-year life and $20,000 salvage value. Determine the depreciation charge and book value for year two.

Question 9

Kobi Technologies book-depreciated an asset at $27,500 per year for four years using the straight line method. If the book value in year two is $65,000, what was ( a ) e asset's salvage value, and ( b ) s basis

Question 10

An asset owned by Photon Environmental was book depreciated by the straight line method over a 5-year period with book values of $296,000 and $224,000 in years two and three, respectively. Determine ( a ) e salvage value used in the calculation, and ( b ) e asset's basis.

Question 11

Carl is curious about the original cost of the digital imaging equipment he uses at the First National Bank. Accounting cannot tell him the cost, but they know the annual depreciation over an 8-year period is $18,900 per year. If all items are straightline depreciated and the salvage is always 25% of the first cost, estimate the original cost.

Question 12

Butler Buildings purchased semi-automated assembly and riveting robotics equipment for constructing its modular warehouse buildings. The first cost was $475,000 and installation costs were $75,000; life is estimated at 10 years with a salvage of 15% of first cost. Use the SL method to determine ( a ) nual recovery rate, ( b ) nual depreciation, ( c ) ok value after 5 years, and ( d ) ok value after 10 years.

Question 13

Columbia Construction purchased new equipment for its project to transform an existing, vacant facility into a milk and butter processing plant. For the equipment, B = $350,000, and S = $50,000. Book depreciation will use the SL method with n = 5 years. Use calculator or spreadsheet-based computations (or both, as directed) plot annual depreciation, accumulated depreciation, and book value on one graph.

Question 14

Halcrow Yolles purchased equipment for new highway construction in Manitoba, Canada, costing $500,000 Canadian. Estimated salvage at the end of the expected life of 5 years is $50,000. Various book depreciation methods are being studied currently. Determine the depreciation for year 2 using the DDB, 150% DB and SL methods.

Question 15

Determine the original basis of a machine that is used for making spill containment pallets if its book value in year 3 is $25,000. The machine has a 5-year life and the double-declining balance method is applied.

Question 16

If an asset is book-depreciated by the DDB method over a 5-year period, how long will it take to reach its salvage value, provided the estimated salvage is 25% of the first cost

Question 17

If the salvage value of an asset is nil and it is depreciated by the double-declining balance method, what percentage of the asset's first cost will remain after its 5-year life

Question 18

An engineer with Accenture Middle East BV in Dubai was asked by her client to help understand the difference between 150% DB and DDB depreciation. Answer the questions if B = $180,000, n = 12 years, and S = $30,000.
a. What are the book values after 12 years for both methods
b. How do the estimated salvage and the two book values after 12 years compare in value
c. Which of the two methods, when calculated correctly considering S = $30,000, writes off more of the first cost over the 12 years

Question 19

Exactly 10 years ago, Boyditch Professional Associates purchased $100,000 in depreciable assets with an estimated salvage of $10,000. For tax depreciation the SL method with n = 10 years was used, but for book depreciation, Boyditch applied the DDB method with n = 7 years and neglected the salvage estimate. The company sold the assets today for $12,500.
a. Compare this sales amount with the book values using SL and DDB methods.
b. If a salvage of $12,500 had been estimated exactly 10 years ago, determine the depreciation for each method in year 10.

Question 20

Shirley is studying depreciation in her engineering management course. The instructor asked her to graphically compare the total percent of first cost depreciated for an asset costing B dollars over a life of n = 5 years for DDB and 125% DB depreciation. Help her by developing the plots of percent of B depreciated versus years. Use a spreadsheet unless instructed otherwise.

Question 21

Del Norte Brick Co. is located near the intersection of Texas, New Mexico, and Mexico. Improved access to the company's property is via a small, privately owned bridge across the Rio Grande River. The cost was $770,000 and it has a recovery period of 15 years. Determine the depreciation and book value for year three according to the MACRS method.

Question 22

An automated assembly robot that cost $400,000 has a depreciable life of five years with a $100,000 salvage value. If the MACRS depreciation rates for years 1, 2, and 3 are 20.00, 32.00, and 19.20%, respectively, what is the book value of the robot at the end of year three

Question 23

The manager of a plant that manufactures stepper drives knows that MACRS and DDB are both accelerated depreciation methods, but out of curiosity, he wants to determine which one offers faster write-off in the first three years for equipment that has a first cost of $300,000, a 5-year life, and a $60,000 salvage value. Determine which method yields the lower book value and by how much.

Question 24

Bison Gear and Engineering of St Charles, IL, makes sensorless and brushless dc gear motors suited for foodservice equipment, factory automation, alternative energy systems, and other specialty machinery applications. The company purchased an asset 2 years ago that has a 5-year recovery period. If the depreciation charge by the MACRS method for year 3 is $14,592, what was ( a ) e first cost of the asset, and ( b ) e depreciation charge in year 1

Question 25

A plant manager for a large cable company knows that the real value of certain types of cablemaintenance equipment is more closely approximated when the equipment is depreciated linearly by the SL method rather than with the more rapid write-off method MACRS. Therefore, he keeps two sets of books, one usingMACRS for taxes and a second using SL for equipment-management purposes. For an asset that has a first cost of $80,000, a depreciable life of 5 years, and a salvage value equal to 25% of the first cost, determine the difference in the book values shown in the two sets of books at the end of year 4, and identify the method that has a lower BV after 4 years.

Question 26

A 120-metric-ton telescoping crane that cost $320,000 is owned by Upper State Power. Salvage is estimated at $75,000. ( a ) mpare book values for MACRS and classical SL depreciation over a 7-year recovery period. ( b ) plain how the estimated salvage is treated using MACRS.

Question 27

Youngblood Shipbuilding Yard just purchased $800,000 in capital equipment for Ship-repairing functions on dry-docked ships. Estimated salvage is $150,000 for any year after 5 years of use. Compare the depreciation and book value for year 3 for each of the following depreciation methods:
a. GDS MACRS where the recovery period is 10 years
b. Double-declining balance with a recovery period of 15 years.
c. ADS SL, as an alternative to MACRS, with a recovery period of 15 years

Question 28

Fairfield Properties owns real property that is MACRS depreciated with n = 39 years. They paid $3.4 million for the apartment complex and hope to sell it after 10 years of ownership for 50% more than the book value at that time. Compare the expected selling price with the amount that Fairfield paid for the property.

Question 29

Blackwater Spring and Metal utilizes the same computerized spring forming machinery in its U.S. and Malaysian plants. Purchased in 2010, the first cost was $750,000 with S = $150,000 after n = 10 years. MACRS depreciation with n = 5 years is applied in the United States and SL depreciation with n = 10 years is used by the Malaysian facility. ( a ) velop and graph the book value curves for both plants. ( b ) the equipment is sold after 6 years for $100,000, calculate the over or under depreciation amounts for each method.

Question 30

Aaron Pipeline has the service contract for part of the Black Mesa slurry coal pipeline in Arizona. The company placed $500,000 worth of depreciable capital equipment into operation. Use the VDB spreadsheet function to calculate the MACRS depreciation and book value schedules for a 5-year recovery period.

Question 31

For a country that allows switching between declining balance (not DDB) d straight line, determine the difference in depreciation for year 2 between the two methods and determine if a switch is advisable. The asset has a first cost of $100,000, a 5-year recovery period, a $10,000 salvage value, and d = 1/ n.

Question 32

Henry has an assignment from his boss at Czech Glass and Wood Sculpting to evaluate depreciation methods for writing off the $200,000 first cost of a newly acquired Trotec CO2 laser system for engraving and cutting. Productive life is 8 years and salvage is estimated at $10,000. Henry wants to compare the PW of depreciation at i = 10% per year for DDB-to-SL switching with MACRS for n = 7 years to determine which is the preferred method. Perform the analysis using a table or a spreadsheet, as requested by the instructor.

Question 33

ConocoPhillips alkylation processes are licensed to produce high-octane, low-sulphur blendstocks domestically and internationally. Halliburton Industries has newly licensed alkylation equipment costing $1 million per system at its Moscow, Houston, and Abu Dhabi refinery service operations. Russia requires a 10-year, straight line recovery with a 10% salvage value. The United States allows a 7-year MACRS recovery with no salvage considered. The United Arab Emirates allows a 7-year recovery with switching from DDB to SL method and no salvage considered. Which of the country's methods has the largest PW of depreciation at i = 15% per year

Question 34

To determine the MACRS rates in Table, the switching procedure in Section 12.5 must be altered slightly to accommodate the half-year convention imposed by MACRS. The first difference is in year 1, where the DDB rate is only one-half of the DDB rate. The second difference is in the denominator for the SL depreciation. The term is ( n t + 1.5), instead of the ( n t + 1) own. The third and final change is that one-half of the SL depreciation allowed in year n is taken in the year n + 1. Use the switching procedure and three changes to verify the MACRS rates for n = 5.
Table MACRS Depreciation Rates Applied to the Basis

Question 35

What is the difference between depreciation and depletion

Question 36

A relatively small privately owned coal-mining company has the sales results summarized below. Determine the annual percentage depletion for the coal mine. Assume the company's taxable income is $140,000 each year.

Question 37

Chaparral Sand and Gravel purchased a pit for $900,000 that is expected to yield 6000 tons of gravel and 7000 tons of sand per year. If the gravel will sell for $6 per ton and the sand for $9 per ton, determine the annual depletion charge according to the percentage depletion method.

Question 38

Vesco Mineral Resources purchased mineral rights to land in the foothills of the Santa Cristo mountains. The cost of the purchase was $9 million. Vesco originally estimated that 200,000 tons of lignite coal was removable. However, further exploration during the second year of operation revealed that a total of 280,000 tons could be economically removed. If the company sold 20,000 tons in year 1 and 30,000 tons in year 2, what are the depletion charges each year according to the cost depletion method

Question 39

Carrolton Oil and Gas, an independent oil and gas producer, is approved to use a 20% of gross income depletion allowance. The write-off last year was $700,000 on its horizontal directional drill wells. Determine the estimated total reserves in barrels, if the volume pumped last year amounted to 1% of the total and the delivered-product price averaged $75 per barrel.

Question 40

Ederly Quarry sells a wide variety of cut limestone for residential and commercial building construction. A recent quarry expansion cost $2.9 million and added an estimated 100,000 tons of reserves. ( a ) timate the cost depletion allowance for the next 5 years for these new reserves, using the projections made by John Ederly. ( b ) ll the depletion charge be limited in any year due to restrictions placed on the cost depletion method

Question 41

For the last 10 years, Am-Mex Coal has used the cost depletion factor of $2500 per 100 tons to write off the investment of $35 million in its Pennsylvania anthracite coal mine. Depletion thus far totals $24.8 million. A new study to appraise mine reserves indicates that no more than 800,000 tons of salable coal remain. Determine next year's percentage and cost depletion amounts, if estimated gross income is expected to be between $6.125 and $8.50 million on a production level of 72,000 tons.

Question 42

All of the following assets can be depreciated, except:

A) a bulldozer.
B) a copper mine.
C) a surgical robot.
D) a conveyor belt.

Question 43

Classical straight line depreciation of a $100,000 asset takes place over a 5-year recovery period. If the salvage value is 20% of first cost, the depreciation charge for year 3 is closest to:

A) $16,000
B) $20,000
C) $24,000
D) $28,000

Question 44

An asset with a first cost of $50,000 is to be depreciated by the straight line method over a 5-year period. The asset will have annual operating costs of $35,000 and a salvage value of $10,000. According to the straight line method, the book value at the end of year 3 will be closest to:

A) $8000
B) $20,000
C) $24,000
D) $26,000

Question 45

A motorized cultivator with a first cost of $28,000 and salvage value of 25% of the first cost is depreciated by the DDB method over a 5-year period. If the operating cost is $43,000 per year, the depreciation charge for year 2 is closest to:

A) $18,000
B) $11,200
C) $6700
D) $4030

Question 46

An assembly line conveyor system with a 5-year life is to be depreciated by the DDB method. The conveyor units had a first cost of $30,000 with a $9000 salvage value. The annual operating cost allocated to the conveyor is $7000 per year. The book value at the end of year 2 is closest to:

A) $6,480
B) $10,800
C) $12,400
D) $18,000

Question 47

Gisele is performing a make/buy study involving the retention or disposal of a 4-year-old machine that was to be in production for 8 years. It cost $500,000 originally. Without a market value estimate, she decided to use the current book value plus 20%. If DDB depreciation is applied, the market value estimate is closest to:

A) $158,200
B) $253,125
C) $217,900
D) $189,800

Question 48

A MACRS-depreciated asset has B = $100,000, S = $40,000, and a 10-year recovery period. (The d t values for years t = 1, 2, 3, 4 and 5 are 10.00%, 18.00%, 14.40%, 11.52%, and 9.22%, respectively.) e depreciation charge for year 4 according to the MACRS method is closest to:

A) $58,700
B) $62,400
C) $11,500
D) $46,100

Question 49

An industrial robot depreciated by the MACRS method has B = $60,000 and a 5-year depreciable life. The MACRS d t values for years 1, 2, 3, 4 and 5 are 10.00%, 18.00%, 14.40%, 11.52%, and 9.22%, respectively. If the depreciation charge in year 3 is $8640, the salvage value that was used in the depreciation calculation is closest to:

A) $0
B) $10,000
C) $20,000
D) $30,000

Question 50

South African Gold Mines, Inc. is writing off its $210 million investment using the cost depletion method. An estimated 700,000 ounces of gold are available in its developed mines. This year 35,000 ounces were produced and sold at an average price of $1400 per ounce. Taxable income for the year is estimated at $4.8 million. The cost depletion for the year is closest to:

A) $7.35 million, which is 15% of the gross income of $49.0 million.
B) $2.4 million, which is 50% of estimated taxable income.
C) $10.5 million.
D) $42 million.

Question 51

Rayonier Forrest Resources purchased a small tract of timber land for $70,000 that contained 25,000 trees. The value of the land was estimated to be $20,000. In the first year of operation, the lumber company cut down 7000 trees. According to the cost depletion method, the depletion deduction for year 1 is closest to: (Hint: Value of land cannot be depreciated or depleted.)

A) $2000
B) $7000
C) $10,000
D) $14,000

Question 52

A stone and gravel quarry in Texas can use a percentage depletion rate of 5% of gross income, or cost depletion rate of $1.28 per ton. Quarry first cost = $3.2 million; estimated total tonnage = 2.5 million tons; tonnage this year = 65,000; gross income = $40 per ton. Of the two depletion charges, the method and larger amount are:

A) percentage at $83,200.
B) percentage at $130,000.
C) cost at $80,000.
D) cost at $130,000.