An automated inspection system purchased at a cost of 200000

An automated inspection system purchased at a cost of $200,000 by Mega Tech Engineering and has a useful life of 7 years. The Salvage Value is expected to be zero. The system was sold after 4 years for $150,000. Determine the depreciation recapture on this equipment. Calculate the depreciation recapture using the following methods. A. SL (1 point) B. SOYD (2 points) C. MACRS (2 points)

Solution

A. Straight Line

Cost = $200,000

Salvage Value = Zero

Usefull Life = 7 Years

So, Depreciation per year= $,200,000/7= $28,571.43

So, Depreciation upto Sale i.e for 4 years = $114,285.71

Sold @ $ 150,000

Carrying Amount = $200,000 - $114,285.71

=$ 85714.29

So, Profit = $ 64,285.71

B. SUM OF YEARS METHOD

Sum of Years = 1+2+3+4+5+6+7 = 28

So, Depreciation for 1st Year = 200000*7/28= $50,000

So, Depreciation for 2nd Year = 200000*6/28= $42,857.14

So, Depreciation for 3rd Year = 200000*5/28= $35,714.29

So, Depreciation for 4th Year = 200000*4/28= $28,571.43

Accumulated Depreciation after 4 years = $157,142.86

Carrying Amount = $ 42,857.14

Sold@ 150,000.

So, Profit = 107,142.86

C. MACRS

Depreciation of an asset with 7 year usefull life will be done over 8 years as per MACRS.

Rates and Depreciation for the 1st , 2nd ....8th yea will be :-

1st year - 14.29% i.e $ 200,000 * 14.29% = $28,580

2nd year - 24.49% i.e $ 200,000 * 24.49% = $48,980

3rd year - 17.49% i.e $ 200,000 * 17.49% = $34,980

4th year - 12.49% i.e $ 200,000 * 12.49% = $24,980

Accumulated Depreciation for 4 years = $137,520

Carrying Amount = $ 62,480

Sold @ $ 150,000

Profit = $ 87,520