Question 7.1: Establish the bases for the computation of depreciation, giv...
Establish the bases for the computation of depreciation, given the following facts:
a. A building is purchased for an immediate payment of $10,000. The forecasted salvage is $500, and the forecasted removal cost is $200.
b. Equipment is purchased for $9,000. The forecasted salvage is $400, and the forecasted removal cost is $600.
Answer to (a)
Cost of Building $10,000
Salvage $500
Removal Cost 200
Net Salvage 300
Base for Depreciation Computation $ 9,700
Answer to (b)
Cost of Equipment $9,000
Removal Cost $600
Salvage 400
Net Removal Cost 200
Base for Depreciation Computation $9,200
In example (b), the depreciation base is greater than the cost of the asset. This is not allowed for tax purposes. It is reasonable that the logic of the situation leads to a depreciable base of $9,200, inasmuch as this will spread all the costs, including the removal costs, over the periods in which the revenues are earned. It is equally reasonable for the Internal Revenue Service to suggest that the depreciable base cannot exceed the cost of the asset.