Sanders Construction Co. Specializes

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Sanders Construction Co. specializes in building replicas of historic houses. Brett Sanders, president of Sanders Construction, is considering the purchase of various items of equipment on July 1, 2014 for $300,000. The equipment would have a useful life of 5 years and no residual value. Brett is considering depreciating the equipment by the straight-line method or the double declining balance method. Straight-line method: $300,000 / 5 = $60,000 Double declining method: • Step 1. Straight-line percentage = 20% (100%/5) • Step 2. Double-declining-balance rate = 40% (20% × 2) • Step 3. Depreciation expense = $120,000 ($60,000 × 40%) • Depreciation factor of 2 is equivalent to annual depreciation rate of 40.00% for 5 years. Year Start Book Value Depreciation Percent Depreciation Amount Accumulated Depreciation Amount End Book Value 1. $300,000 40.00% $120,000 $120,000 $180,000 2. $180,000 40.00% $72,000 $192,000 $108,000 3. $108,000 40.00% $43,200 $235,200 $64,800 4. $64,800 40.00% $25,920 $261,120 $38,880 5. $38,880 100.00% $38,880 $300,000 $0 To calculate straight-line depreciation when you buy a building or equipment for your business, you calculate the useful life of the asset. Find the useful life of your asset, and then determine the salvage value at the end of the asset’s useful life. Subtract the salvage value from the original cost. Divide that figure by the number of years it will last. You can write off that figure each year on your taxes. The IRS publishes a

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