A video recording system was purchased 3 years ago at a cost of 30,000 with an e

Question

A video recording system was purchased 3 years ago at a cost of 30,000 with an estimated 5 year recovery period or useful life, and no salvage value.

4. A video recording system was purchased 3 years ago at a cost of $30,000 with an estimated 5-year recovery period or useful life, and no salvage value. There are three commonly-used depreciation methods: straight line (SL), declining balance (DB)/ double declining balance (DDB), and Modified accelerated cost recovery system (MACRS). a. In present time (year 3 only), which depreciation method gives the largest depreciation charge (Ds)? b. In year 2 only, which depreciation method gives the smallest Book Value (BV2)? c. Compare BV at year 5 (BVs) between SL, DDB, and MACRS. Explain the reason for the difference, if any d. If the video recording system is taxable, which depreciation method should be used in year 4? t Line Double Declining Balance MACRS dMACRS Year BV BV 0 30,000 30,000 30,000 20.00% 32.00% 19.20% 11.52% 11.52% 5.76% now 4

Explanation / Answer

Year Straight Line DDB MACRs D BV D BV D dMACRS BV 0                 -            30,000                   -            30,000                -            30,000 1          6,000          24,000          12,000          18,000          6,000 20%          24,000 2          6,000          18,000            7,200          10,800          9,600 32%          14,400 3          6,000          12,000            4,320            6,480          5,760 19.20%            8,640 4          6,000            6,000            2,592            3,888          3,456 11.52%            5,184 5          6,000                   -              1,555            2,333          3,456 11.52%            1,728 6          1,728 5.76%                   -   Straight Line Method - Dep. Per annum = $30,000 / 5 Years = $6,000 Per annum DDBM Rate of Dep. Under DDDM = 2 X 20% (rate of Dep. Under Straight Line Method) Rate of Dep. Under DDDM = 40% Answer 1. In Year 3 - MACRs Method has the Highest Depreciation = $9,600 Answer 2. Smallest Book Value at the end of Year 2 = DDBM = $10,800 DDBM is a acclerated method of depreciation in which maximum deprecition is charged in the early life of the equipment. Answer 3. In the year 4, if Vieo Recording is Taxable in Year 4, The straight line method is best, because it gives maximum depreciation expense in year 4. But, if the video recording is taxable from the staet, then DDBM is the best, because maximum depreciation is charged in early life of the asset.

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