Question

Talia�s Tutus bought a new sewing machine for $45,000 that will be depreciated over 5-year using double declining-balance depreciation with a switch to straight line

a. Find the depreciation charge each year. Year Depreciation 1 $ __________ 2 __________ 3 __________ 4 __________ 5 __________

b. If the sewing machine is sold after 2 years for $32,000, what will be the after-tax proceeds on the sale if the firm's tax bracket is 35%?

After-tax proceeds $ _________

Answer 1

a)Double means 200% of the straight line rate of depreciation,thus the rate of depreciation under double declining balance method of depreciation is;

Depreciation per year under Straight line=$45000/5=$9000

Rate of depreciation=[($9000/45000)*2]*100

=40%

Staement showing amount depreciation

Method of depreciation	Year	Depreciable amount	Rate%	Depreciation amount
Double declining	1	$45000	40%	$18,000
	2	$27,000	40%	$10,800
	3	$16,200	40%	$6480
Straight line(note)	4	$9,720	50%	$4860
	5	$4860	50%	$4860

We switch to straight line method in year 4 as the depreciation generated by straight line is greater than that of double declining balance method.

b)Calculation of after tax sale proceeds

Book value at the end of year2 is;

=$45000-$18000-$10800=$16,200

Net Income=$32,000-$16200=$15,800

After tax proceed=Net Income(1-tax rate)

=$15,800(1-0.35)

=$10,270

answered by: anonymous