Use the following method to calculate the yearly depreciation allowances and book values for a firm that has purchased $150,000 worth of office equipment that qualifies as depreciation property. The equipment is estimated to have a salvage (market) value of $30,000 (20% of the original cost) after the end of its 10-year depreciable life.

a. Straight line

b. MACRS

c. Sum-of-Years' Digits

a. Straight Line Method Depreciation = $ 2400

b. MACRS

c. Sum-of-Years' Digits

Explanation:

a. Straight Line Method Depreciation=

Purchase Cost - Salvage Value / No of useful life * depreciation rate

=$ 150,000 - $30,000/10 * 20%

=120,000/10 * 20% = 12000 * 20/100=$ 2400

b. MACRS

Since it is a non-form 10-year property, the company can elect to use either the 150% or 200% declining balance method.

Depreciation in 1st Year = Cost * 1/Useful Life * A * Depreciation Convention

Depreciation in Subsequent Years =

(Cost - Depreciation in Previous Years) * 1 / Recovery Period * A

Where,

A is 100% or 150% or 200%.

Depreciation for the the first year $ 150,000/10 * 200% = $30,000

Depreciation for the the 2nd year = $ 150,000-30,000/10 * 200% = $24,000

Depreciation for the the third year = $ 150,000-30,000 - 24000/10 * 200%

=$ 19,200

Depreciation for the the 4th year $ 150,000-30,000-24000-19200/10 * 200% = Note A

Note A: MACRS declining balance changes to straight-line method when that method provides an equal or greater deduction. Deduction under 200% declining balance MACRS for 4th year would be $ 153,600 ($150000 - $30,000 - $24000 - $19200 * 1/10 * 200%. This is greater than depreciation under straight line method.

c. Sum-of-Years' Digits Method Depreciation

Depreciation Amount = Acquisition Cost - Salvage Value = $ 120,000

Sum of useful life = 10+9+8+7+6+5+4+3+2+1 = 55

Depreciation Factor = 10/55, 9/55, 8/55, 7/55 etc.

Depreciation for the 1st year = 10/55 * 120,000 = $ 21,818.2

Depreciation for the 2nd year = 9/55 * 120,000 = $ 19 636.4

Depreciation for the 3rd year = 8/55 * 120,000 = $17,546

Depreciation for the 4th year = 7/55 * 120,000 = $ 15,273

Depreciation for the 5th year = 6/55 * 120,000 = $ 13,091

Depreciation for the 6th year = 5/55 * 120,000 = $ 10,909.1

Depreciation for the 7th year = 4/55 * 120,000 = $ 8727.3

Depreciation for the 8th year = 3/55 * 120,000 = $ 6545.5

Depreciation for the 9th year = 2/55 * 120,000 = $4363.63

Depreciation for the 10th year = 1/55 * 120,000 = $ 2181.81