Question

DEPRECIATION COMPUTATIONS

ON JULY 1, 2015 DOLBY CORP PURCHASED SOME NEW EQUIPMENT TO BE USED IN THEIR RECORDING STUDIO. THE EQUIPMENT COST $70,000 AND IT IS EXPECTED TO HAVE A SALVAGE VALUE OF $8,000 AFTER ITS USEFUL LIFE OF 6 YEARS. IT IS ESTIMATED THAT THE MACHINE WILL BE USED FOR 32,000 HOURS OF RECORDING OVER THE 6 YEARS. DOLBY USED THE EQUIPMENT FOR 8,000 HOURS AND 9,000 HOURS FOR THE YEARS 2015 AND 2016 RESPECTIVELY. MACRS (TAX) DEPRECIATION SPECIFIES A FIVE-YEAR RECOVERY PERIOD FOR THIS ASSET. THE IRS TABLE SHOWS THE FOLLOWING PERCENTAGES FOR DEPRECIATION: YEAR PERCENTAGE FIRST 20% SECOND 32% THIRD 19.20% FOURTH 11.52% FIFTH 11.52% SIXTH 5.76% CALCULATE THE DEPRECIATION EXPENSE FOR 2015 AND FOR 2016 USING (a) the straight-line method, (b) the DDB method, (3) the units of activity method, and (4) the MACRS method.

Answer 1

a) Straight-line Method
Annual Depreciation =( $70,000 - $8,000)/6	$10,333.33
Depreciation for 2015 = $10,333.33 x 6 months /12 months	$5,166.67
Depreciation for 2016	$10,333.33
b)DDB Method
Rate of Depreciation = 1/ useful life x 100% = 1/6 x 100%	16.67%
DDB rate of Depreciation = 16.67% x 2	33.33%
Depreciation for 2015 = $70,000 x 33.33% x 6/12 months	$11,666.67
Depreciation for 2016 = ($70,000 - 11,666.67) x 33.33% x 6/12 months	$19,444.44
c)units of activity method
Depreciation per unit = ($70,000 - $8,000)/32000 hours	$1.94	per hour
Depreciation for 2015 = $1.94 x 8000 hours	$15,500.00
Depreciation for 2016 = $1.94 x 9000 hours	$17,437.50
4) MACRS
Depreciation for 2015 = $70000 x 20%	$14,000.00
Depreciation for 2015 = $70000 x 32%	$22,400.00