Present your depreciation schedules in the tabular format and show work done to

Question

Present your depreciation schedules in the tabular format and show work done to get answer!

1. A large profitable corporation purchased a small jet plane for use by its executives. The plane cost $3,500,000. It has a depreciation life of seven years and $0 salvage value. Develop the complete depreciation schedule for the plane showing year-by-year depreciation charges and book values, and determine the present worth of all the depreciation charges assuming an interest rate of 6% per year, using: (a) the DDB method with switch to SL and (b) MACRS depreciation.

Explanation / Answer

(a) With SLM, annual depreciation = $3,500,000 / 7 = $500,000

SLM depreciation rate = 1 / 7

DDB Depreciation rate = 2 x 1 / 7 = 2 / 7

Each year, comparison is made between DDB depreciation and SLM depreciation of remaining book value. A switch from DDB to SLM is made in the year when SLM depreciation is higher than DDB Depreciation. From table below, the switch happens in year 5.

So, Total depreciation schedule & Present worth (PW):

(b) MACRS Depreciation schedule, assuming 7-year property class & mid-year convention

Year DDB Remaining book value SLM 1 3,500,000 x 2/7 = 1,000,000 25,00,000 3,500,000 / 7 = 500,000 2 2,500,000 x 2/7 = 714,286 17,85,714 2,500,000 / 6 = 416,667 3 1,785,714 x 2/7 = 510,204 12,75,510 1,785,714 / 5 = 357,143 4 1,275,501 x 2/7 = 364,431 9,11,070 1,275,501 / 4 = 318,875 5 911,070 x 2/7 = 260,306 6,50,764 911,070 / 3 = 303,690 6 650,764 x 2/7 = 185,933 4,64,831 650,764 / 2 = 325,382 7 464,831 x 2/7 = 132,809 3,32,022 464,831 / 1 = 464,831

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