I need step bu step using the correct formulas. this is an example they used in
ID: 2527624 • Letter: I
Question
I need step bu step using the correct formulas. this is an example they used in book but I'm still confused
1-55 A purchased machine cost $320,000 with delivery and installation charges amounting to $30,000. The declared salvage value was $50,000. Early in Year 3, the company changed its product mix and found that it no longer needed the machine. One of its com petitors agreed to buy the machine for $180,000 Determine the loss, gain, or recapture of MACRS depreciation on the sale. The ADR is 12 years for this machine.Explanation / Answer
Total cost of the machine = purchase price of machine + installation cost = $320,000+$30,000 = $350,000
In MACRS depreciation calculation, Salvage value is not considered.
Since the machine is discarded in the fourth year, Depreciation on machine is calculated for four years only:
Year 1: $350,000 * 1/12 * 200% *0.5 = $29,166.67
Ending value at the end of year 1 = $350,000 - $29,166.67 = $320,833.33
Year 2: 320,833.33*1/11*200% = $58,333.33
Ending Value at the end of year 2 = $320,833.33 - $58,333.33 = $262,500
Year 3: 262500 * 1/10 * 200% = $52,500
Ending value at the end of year 3 = $262,500- $52,500 = $210,000
Year 4: $210,000 *1/9 *200% = $46,667
Ending Value at the end of year 4 = $210,000 - $46,667 = $163,333
Here as per the question the beginning value of the asset was the ending value at the end of year 3, = $210,000
And beginning in year 4 it was sold at $180,000.
Hence there was a loss in the sale of machine to one of its competitors.
Loss = $180,000 - $210,000 = - $30,000