1.Used bottling equipment was acquired by Summit Brewing at a cost of $900,000 o

Question

1.Used bottling equipment was acquired by Summit Brewing at a cost of $900,000 on August 1, 2010. Its estimated salvage value is $ -0- and its expected life is five years. Calculate the depreciation expense (round to the nearest dollar) by each of the following methods, showing all of your calculations. For the year of acquisition, use the mid-year convention. Why are we using the mid year convention?

A. Straight-line for the calendar years 2010 and 2011, and 2012.
B. Double-declining-balance for the calendar years 2010 and 2011, and 2012.

2. A new building was acquired by Summit Brewing at a cost of $1,950,000 on February 9, 2011. The useful life is 39 years. Salvage value is zero. Compute depreciation for 2011 and 2012 (straight line method). For the year placed in service, use the mid-month convention. Why are we using the mid-month convention?

3. A new truck was acquired by Summit Brewing at a cost of $90,000 on April 1, 2011. The useful life is 5 years. Salvage value is zero. Additionally, brewing equipment was acquired on October 1, 2011 at a cost of 61,600. The useful life is 7 years and salvage value is zero. Compute depreciation for 2011 and 2012 using the double declining balance method. For the year placed in service, use the mid-quarter convention. Why is the mid-quarter convention necessary?.

Explanation / Answer

Mid-year convention - Generally the mid-year convention applies to all classes of property except real estate. The mid-year convention assumes that personal property is placed in service (and disposed of) in the middle of the year. Under this convention, a half-year of depreciation is allowed in both the first and last years of use. As a result, it takes four years to fully depreciate 3-year property, six years to depreciate 5-year property etc. 1. Annual Dep using SLN = (Cost-Salvage)/Life = ($900,000-0)/5 = $180,000 Using Mid-Year convention, Dep in 2010 will be $180,000/2 = $90,000 In Year 2011 & 2012, dep will be $180,000 each Double-declining-balance : To use double declining balance depreciation method , we first calculate depreciation using the straight line method. They figure out the total percentage of the asset that is depreciated the first year and double it. Each subsequent year, that same percentage is multiplied by the remaining balance to be depreciated. Dividing Annual Dep using SLN = $180,000 by Cost $900,000, we calculate the straight-line depreciation charge of $180,000 as ($180,000/$900,000) = 20% of the total depreciation amount of $900,000. Using this information, we double the 20% figure to 40%. So First Year Dep is 40% of Asset Value = 40%*900,000 = $360,000 But as Asset is in use for 6 months (Mid Year convention), So Dep for 2010 = $360,000*(6/12) = $180,000 Year 2011 will have Dep = 40%*(900,000-180,000) = $288,000 Year 2012 will have Dep = 40%*(900,000-180,000-288,000) = $172,800 2. mid-month convention : The mid-month convention is used only for real estate. This convention allocates depreciation according to the number of months the real estate is in service. The mid-month convention assumes that real estate is placed in service (and disposed of) in the middle of the month. Therefore, the months of acquisition and disposition are counted only as half months. You are never allowed a full year's depreciation in the year of acquisition or disposition under this convention Dep using SLN = (Cost-Salvage)/Life = $1,950,000/39 = $50,000 Using Mid Monh method, we have half mnth dep in Feb. SO Total month for Dep in 2011 will be 10.5 month. So Dep in 2011 = $50000*(10.5/12) = $43,750 Dep in 2012 = $50,000 3. mid-quarter convention : Mid-quarter convention - The mid-quarter convention applies to personal property and assumes that all property is placed in service and disposed of in the middle of the quarter of the year of acquisition and disposition. If more than 40% of the depreciable basis of personal property is placed in service during the last three months of the tax year, you must use the mid-quarter convention. Therefore, it is important to identify those situations in which more than 40% of the personal property was placed in service in the last three months of the year. MACRS percentage tables with the appropriate depreciation percentages for the quarter of acquisition are available for computing the depreciation deduction. Double declining is 200% . There are 4 quarters in the year. And each quarter's weight would be 25%. (25% *4 = 100%). And since it is mid-quarter method-the property (Truck) acquired in Apr. Half of 25% would be 12.5%. So total weight would be 12.5%(Apr-Jun quarter)+ 25% (Third quarter) + 25% ( last quarter )= 62.5%. For Brewing eqpt, Half of 25% would be 12.5%. So total weight would be 12.5%( last quarter )= 12.5%. So Total Dep using DDM in 2011 for Truck will be = (Cost/Life)*2(Doube decliming)*62.5% = $90,000/5 *2*62.5% = $22,500 Dividing Annual Dep using SLN = $18,000 by Cost $90,000, we calculate the straight-line depreciation charge of $18,000 as ($18,000/$90,000) = 20% of the total depreciation amount of $90,000. Using this information, we double the 20% figure to 40%. In 2012, Dep = 40%*(90,000-22500) = $27,000 Simiary for Brewng eqpt, Annul Depusing SLN = $61600/7 = $8800 So we calculate the straight-line depreciation charge of $8800 as ($8800/$61600) = 14.29% of the total depreciation amount . Using this information, we double the14.29% figure to 28.57%. For Brewing eqpt, Half of 25% would be 12.5%. So total weight would be 12.5%( last quarter )= 12.5%. So Total Dep using DDM in 2011 for Brewing will be = (Cost/Life)*2(Doube decliming)*12.5% = $61600/7 *2*12.5% = $2200 In Year 2012, Dep = 28.57%*(61600-2200) = $16,971

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