Question

Francis Corporation purchased an asset at a cost of \(50,000 on March 1, 2017. The asset has a useful life of 8 years and a salvage value of \)4,000. For tax purposes, the MACRS class life is 5 years. Compute tax depreciation for each year 2017–2022.

Short answer

Answer

Total depreciation expense = $50,000

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Depreciation

Depreciation can be stated as the decline in the value of an asset over a useful period. All assets depreciate over time, except land whose value increases with the passage of time. Among the various methods of depreciation, straight-line depreciation is considered to be the simplest and error-free method.

Computing tax depreciation

Date	Calculation	Depreciation expense
2017	$50,000 x 20 %	$10,000
2018	$50,000 x 32 %	16,000
2019	$50,000 x 19.2 %	9,600
2020	$50,000 x 11.52%	5,760
2021	$50,000 x 11.52%	5,760
2022	$50,000 x 5.76 %	2,880
		$50,000

Working note:

For calculating depreciation expense following formula should be used

$\text{Depreciation\hspace{0.17em}expense}=\text{Cost\hspace{0.17em}of\hspace{0.17em}asset}\times \text{Depreciation\hspace{0.17em}rate}$

Like, for calculating depreciation for 2017

$\begin{array}{c}\text{Depreciation\hspace{0.17em}expense}=\text{Cost\hspace{0.17em}of\hspace{0.17em}asset}\times \text{Depreciation\hspace{0.17em}rate}\\ \text{=\$50,000}\times \text{20\%}\\ \text{=\$10,000}\end{array}$

For computing depreciation following formula should be used.

$\text{Depreciation\hspace{0.17em}rate}=\frac{\text{Year}}{\text{Useful\hspace{0.17em}life\hspace{0.17em}of\hspace{0.17em}asset}}$

Like, for 2017 depreciation rate is as follows:

$\begin{array}{c}\text{Depreciation\hspace{0.17em}rate}=\frac{\text{Year}}{\text{Useful\hspace{0.17em}life\hspace{0.17em}of\hspace{0.17em}asset}}\\ =\frac{1}{5}\\ =20\%\end{array}$