An asset owned by Photon Environmental was book-depreciated by the straight line method over a 5?year period with book values of $296,000 and $224,000 in years 2 and 3, respectively. Determine (a) the salvage value S used in the calculation, and (b) the unadjusted basis B.
What will be an ideal response?
(a) Depreciation is constant and determined from the change in book value
D = 296,000 - 224,000 = 72,000/year
Since the asset has a 5-year life, 2 more years of depreciation will reduce BV to the salvage value S.
S = 224,000 – 2(72,000) = $80,000
(b) (B – 80,000)/5 = 72,000
B = $440,000
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