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.

page revision: 2, last edited: 10 Mar 2009 18:07