Question

4. At the beginning of the fiscal year, G&J Company acquired new equipment at a cost of $99,000. The equipment has an estimated life of five years and an estimated salvage value of $7,000.

(a) Determine the annual depreciation (for financial reporting) for each of the five years of estimated useful life of the equipment, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by using

(a.1) the straight‐line method and

(a.2) the double-declining-balance method.

(b) Determine the annual depreciation for tax purposes, assuming that the equipment falls into the seven‐year MACRS property class.

(c) Assume that the equipment was depreciated under MACRS for a seven‐year property class. In the first month of the fourth year, the equipment was traded in for similar equipment priced at $110,000. The trade‐in allowance on the old equipment was $15,000, and cash was paid for the balance. What is the cost basis of the new equipment for computing the amount of depreciation for income‐tax purposes?

Answer 1

Answer a)

a) Annual Depreciation = (Cost of equipment -salvage value)/ life time

annual depreciation = (99,000-7000)/5 = $18,400

End of year 1

Accumulated depreciation = $18,400 Book Value = $80,600

End of year 2

Accumulated depreciation = $36,800 Book Value = $62,200

End of year 3

Accumulated depreciation = $55,200 Book Value = $43,800

End of year 4

Accumulated depreciation = $73,600 Book Value = $25,400

End of year 5

Accumulated depreciation = $92,000 Book Value = $7,000