Quiz 9: Depreciation and Corporate Taxes
Economic depreciation can be defined as the reduction in the price of the stock of a firm, company or country either due to physical wear and tear, changes in the buying pattern or unfashionableness. The book value is the amount or the value of an asset as mentioned in the firm accounts. It is given that the cost price of the machine 4 years ago was $30,000. The book value is $9,369 and it can be sold for $12,000. The life remaining of the asset is 3 years. The present value of economic depreciation can be computed as shown below: Hence, the present value of economic depreciation is .
Simple line depreciation is considered as the most simple and best method of depreciation. To calculate the annual depreciation charge, a simple formula is used which is shown below: Where I represent cost of the equipment, S represents salvage value and N represents the life of the project. The question requires us to calculate the depreciation of a new machine on every 31 st December for the years 2010, 2013 and 2016 where the cost of the machine is $82,000 and its installation cost is $3,000. Machine has expected useful life of 10 years, its salvage value is $3,000. Book depreciation expense for 2010 can be calculated as given below: Hence, the Book depreciation expense for 2010 is . Calculation for the book value of the machine for the next 3 years is given in the table mentioned below: Calculated book values are found to be: Now, it is required to calculate the depreciation expenses for 2013. In 2013, $8,000 was spent on repairing of machine. The calculations for depreciation are given below: Hence, the Book depreciation expense for 2013 is . Calculation for the book value of the machine for the next 3 years is given in the table mentioned below: Calculated book values are found to be: Now, it is required to calculate the depreciation expenses for 2016. On 2 nd January 2016, $5,000 was spent in order to make improvements in machine which lead to increase in its salvage value to $6,000. So, the depreciation expense would be: Hence, the Book depreciation expense for 2016 is .
The ninth chapter that is in the text focuses on various ways depreciation is calculated as well as various situations where corporate income taxes are calculated as well. Some of the items mentioned include MACRS depreciation, economic depreciation, tax rate analysis, and more. For the question needing answered here, we have an automobile that one sold for a price of $14,000.00. When it was purchased three (3) years ago, the initial cost of the vehicle was $20,000.00. The depreciation schedule was a five (5) year MACRS property class timeframe and the net book value was $5,760.00. In this situation, what was the economic depreciation value for the car When doing a problem like this, one needs to take a gander at the section which on economic depreciation in the early parts of the chapter. Here, the one thing that should be noted is that economic depreciation is the loss of value that is for a purchased asset minus the price that it can be sold at a specific point of time (whether current or in the near future). Applicable to the situation here, we have an initial cost of $20,000.00 for the asset and a market selling price of $14,000.00. Note that in this situation, this is the price the car was sold far. Though the asset value of the vehicle is $5,760.00, this is the value that one would not want to use in order to get the economic depreciation value for an asset. Rather, it is important to remember that this is the difference between the initial purchase price and the market selling price at a current (or near current) point in time. Thus, when we take these two values and get the net difference, the economic depreciation value here is $6,000.00. As one can see here, it is slightly above the netted depreciation cost for the vehicle in question.
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