Chapter 9: Depreciation and Corporate Taxes
Economic Depreciation
Note: Use current tax rates for corporate taxes.
9.1 The loss of value is defined as the purchase price of an asset less its market
Cost Basis
9.3
•Total property value with the house:
Land
Building
Original cost
$155,000
$245,000
$155,000
9.4 Cost basis for flexible manufacturing cells:
Flexible Manufacturing cells ($400,000 x 3)
$1,200,000
Freight charges
$20,000
Handling fee
$15,000
Site preparation costs
$45,000
$24,000
Cost basis
$1,307,500
9.5
• Unrecognized profit
$46,220
$40,000
$6,220
9.6
• Unrecognized profit
$7,808
$9,000
$1,192
$38,000
$1,192
$36,808
Book Depreciation Methods
9.7
n
(a) SL
(b) DDB
n
D
n
B
n
D
n
B
1 $35,000 $200,000 $94,000 $141,000
2 $35,000 $165,000 $56,400 $84,600
Cost of new drill
$148,000
Plus: unrecognized loss
$6,220
Cost basis of new drill
$154,220
9.8 Given: I = $125,000, n = 3 years, N = 8.
9.9 DDB switching to SL:
n
n
D
n
B
1
$35,141
$87,859
2
$25,104
$62,755
3
$17,933
$44,822
4
$12,805
$32,017
5
$10,676
$21,341
6
$13,000
7
$13,000
9.10 Given: I = $88,000, S = $13,000, N = 6 years.
(a)
1
$29,333D=
,
2$19,556D=
,
3
$13,037D=
(b) DDB Switching to SL
n
n
D
n
B
1 $29,333 $58,667
Comments: If the regular DDB deduction were taken during the fifth year,
5
B
would be less than the salvage value. Therefore, it is necessary to adjust
5
D
.
The number in the box represents the adjusted value. No switching is common for
this type of situation whenever the salvage value is high.
9.11 Given: I = $200,000, S = $32,000, N = 8 years
n
n
D
n
B
1
$50,000
$150,000
2
$37,500
$112,500
9.12
(a)
12 0.3333
6
α

= =


9.13 Given: I = $55,000, N = 5 years, S = $5,000
n (a) SL (b) DDB
1
$10,000
$22,000
2
$10,000
$13,200
3
$10,000
4
$10,000
5
$10,000
9.14 Given: I = $56,000, S = $6,500, N = 12 years
(a)
$56,000 $6,500 $4,125
12
D−
= =
3
$28,125
$84,375
4
$21,094
$63,281
5
$15,820
$47,461
6
$11,865
$35,596
Units–of–Production Method
9.15 Allowed depreciation amount
9.17
(a) Straight line:
11
257,000 32,000 $22,500; $234,500
10
−
= = =DB
(b) UP:
11
257,000 32,000 (23, 450) $21,105; $235,895
250,000
−
= = =DB
Tax Depreciation
9.18 Given: I = $265,000, Delivery and installment costs =$46,000, N = 12 years,
and 7-year MACRS
(b)
n MACRS Depreciation
1 $44,442
2 $76,164
9.19 Given: I = $35,000, S = $6,000, N = 8 years, and 5-year MACRS
n
Book Depreciation
MACRS Depreciation
1 $3,625 $7,000
2 $3,625 $11,200
9.20 (a) Cost basis:
$190,000 $25,000 $215,000+=
9.21 Given: I = $100,000, S = $20,000, N = 7 years
9.22 Let I denote the cost basis for the equipment.
9.23 Given: I = $92,000, S = $12,000, N = 5 years, 7–year MACRS depreciation
class
9.24 Given: I = $50,000, tax depreciation method = 6–year MACRS property
class with half-year convention
200% DB SL MACRS
9.25 Since the land is not depreciable, just consider the building depreciations.
Given: I = $250,000, tax depreciation method = 27.5-year MACRS property
Depreciation Allowed
rate depreciation
1 2.5758% $6,439
n
9.26 Given: I = $53,000 and 7-year MACRS property
1 $7,574
n
nD
9.27 Given: Residential real property (27.5-year), I = $270,000
(a)
(b) Total amount of depreciation over the 4-year ownership, assuming that the
asset is sold at the end of 4th calendar year:
Rate
1 0.7576% $2,045
n
nD
9.28
Types of Asset
I
II
III
IV
Depreciating Methods
SL
DDB
UP
MACRS
($)
9.29
(a) Book depreciation methods:
• Straight-line method:
n
D
n
B
n
Cum. D
n
1
$15,800
$73,200
$15,800
4
$15,800
$25,800
$63,200
• DDB method:
n
D
n
B
n
Cum.
D
n
1
$35,600
$53,400
$35,600
(b) Tax depreciation: 7–year MACRS
n Dn Bn Cum. Dn
1
$12,718
$76,282
$12,718
2
$21,796
$54,486
$34,514
(c) Trade–in allowance
Book value of the old equipment (B3) $38,920
Less: Trade–in allowance $20,000
Unrecognized loss
($18,920)
Cost of new equipment
Depletion
9.30
(a)
Ore mine:
(b)
For tax year 2015:
9.31
• Depletion allowed per MBF =
$600,000 $88, 235.29 per MBF
6.8 =
9.32 Percentage depletion versus cost depletion:
Gross Income
$48,365,000
Depletion
×
15%
9.33
(a) Cost basis:
(b) Depletion charge for parcel A:
Percentage depletion:
(c) Percentage depletion versus cost depletion for parcel A in year 2016:
Percentage depletion:
– Gross income = $75 × 1,000,000 = $75,000,000
(d) Percentage depletion versus cost depletion for parcel B in year 2016
Cost depletion:
$4.80(800, 000) $3,840,000=
Percentage depletion:
– Gross income = $75 × 800,000 = $60,000,000
Gross Income
$60,000,000
Depletion
×
15%
Book value at the beginning of year 2017:
$24,000,000-$9,000,000 = $15,000,000
The revised cost per bbl is
9.34
(a) Cost depletion:
50%
(b) Percentage depletion:
Gross Income
$15,000,000
Depletion
×
10%
Revision of Depreciation Rates
9.35
(a)
$800,000 / 25 $32,000D= =
12.5
9.36
(a) Book depreciation amount for 2016:
50%