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

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

Step-by-step 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