Midterm 2 Depreciation Problems

Using the Depreciation Table:

For this problem, consider the purchase of a $100,000 barge, a 10 year asset, for a lumber recovery business.

1) How much depreciation will you take in the 9th year you own the asset?

A) $6,560
B) $93,440
C) $10,000
D) None of the above

Answer: This is a class 10 asset, with a cost basis of $100,000. To get the depreciation, we use the Cost Basis times the number in the table indicating the appropriate year. We would use $100,000(.0656) to get $6,560, which is A.

2) What is the book value of the barge after you have owned it for 9 years?

A) $90,170
B) $10,000
C) $9,830
D) None of the above

Answer: To find the book value, we use the equation Book Value = Cost Basis - Depreciation.

Year Depreciation Book Value
1 $10,000 $90,000
2 $18,000 $72,000
3 $14,400 $57,600
4 $11,520 $46,080
5 $9,220 $36,860
6 $7,370 $29,490
7 $6,550 $22,940
8 $6,550 $16,390
9 $6,560 $9,830

Subtracting the depreciation from our cost basis of $100,000, we get our book value. In the 9th year, the book value of the barge is at $9,830, which is answer C.

3) What is the book value of the barge when you sell it in the 9th year?

A) $90,170
B) $13, 110
C) $15,000
D) None of the above

Answer: We can see in our previous table that the depreciation from year 8 to year 9 is $6,560. Since we are selling the asset in year 9, we would use a half-yearly convention, where we cut the depreciation in half. $6,560/2 = $3,280. Adding this to our book value of $9,830, we get a new book value of $13,110, which is answer B.

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