PRACTICE PROBLEMS: DEPRECIATION

1. In order to make it worthwhile to purchase a piece of equipment, the annual depreciation costs for the
equipment cannot exceed P295,000 at any time. The original cost of the equipment is P3M and a salvage
value of P50,000. Determine the length of service life necessary if the equipment is depreciated by
a. Sum-of-the-years-digit method
a. 30 b. 19 c. 25 d. 23

b. Declining - balance method

a. 30 b. 40 c. 29 d. 31
c. Straight-line method
a. 8 b. 10 c. 14 d. 12
d. The original cost of a certain piece of equipment is P500,000 and is depreciated by a 12% sinking
fund method. Determine the annual depreciation charge if the book value of the equipment after 10
years is the same as if it had been depreciated at P40,000 each year by straight line formula.
a. P22,793.67 b. P497,026 c. P683,113 d. P383,600 e. P735,600

2. An asset for drilling was purchased and placed in service by a petroleum production company. Its cost
basis is P6M and has an estimated book value of P1.2 M at the end of an estimated useful life of 14
years. Compute the depreciation amount in the third year and the book value at the end of the fifth
year of life by each of these methods.
a. The straight-line method
a. P4.29M b. P2.78M c. P5.5M d. P6.5M

b. The SYD method

a. P4.29M b. P2.78M c. P1.34M d. PP3.26M

c. The 200% DB method with switchover to straight line

a. P4.29M b. P2.78M c. P1.34M d. P3.26M

d. The GDS (For petroleum, recovery period is 7 years;)

a. P4.29M b. P2.78M c. P1.34M d. P P3.26M

e. ADS
a. P4.18M b. P2.78M c. P1.34M d.P4.07M

3. An optical scanning machine was purchased for P150,000 in the current tax year (year one) It is to be
used for reproducing blueprints of engineering drawings, and its MACRS class life is nine years. The
estimated market value of this machine at the end of 10 years is P30,000.
a. What is the GDS recovery period of the machines?
a. 4years b. 5 years c. 6 years d. 7 years
b. Based on your answer to the preceding question , what is the depreciation deduction in year four?
a. P 15, 500 b. P25, 920 c. P 16,500 d. P17, 280
c. What is the BV at the beginning of year 5?
a. P 15, 500 b. P25, 920 c. P 16,500 d. P17, 280

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 4. Your company has purchased a large new truck for over-the road use (asset class 00.26). It has a
basic cost of P1.8M. With additional option costing P150,000, the cost basis for depreciation
purposes is P1.95M. Its market value at the end of five years is estimated as P400,000. Assume it will
be depreciated under GDS.
a. The cumulative depreciation through the end of year three is closest to: (Note: Recovery period is
3 years using GDS)
a. P1.950 M b. P1.878 M c. P 1.800M d. P1.806 M
b. The MACRS depreciation in year four is most nearly.
a. 0 b. P1.33,400 c. P 144,500 d. P311,500
c. The book value at the end of year 2 is most nearly
a. P330,000 b. P360,000 c. P 420,000 d. P433,000
d. The depreciation deduction in year 3 when the equipment is disposed of prior to year 4.
a. P330,000 b. P360,000 c. P 420,000 d. P433,000
5. An old pump costs P25,000 a year to maintain. What expenditure for a new pump is justified if no
maintenance will be required for the first 2 years, P5,000 a year for the next 8 years and P25,000 a year
thereafter. Assume cost of money is 10% pa and no other costs are to be considered.
a. P126,940 b. P 131,569 c. P 126,825.03 d. P162,825.03
6. A firm purchased and placed in service a new piece of semi-conductor equipment The cost basis for the equipment
is P100,000.
a. Determine the depreciation charge permissible in the fourth year. Use Modified Accelerated Cost Recovery
System (MACRS). Class life is six years
a. P 10,126 b. P 12,131 c. P11,825 d. P11,520

b. What is the book value at the end of the fourth year (BV4)?
a. P 10,126 b. P 12,131 c. P11,825 d. P17,280
7. A company purchased an equipment for P 11,000,000. The salvage value is estimated at P1,000,000 after a useful
life of 10 years. Which method of depreciation will give the highest book value after 4 years? (show your
calculations)
a. Straight line b. SYDM
8. A company purchased an equipment for P 11,000,000. The salvage value is estimated at P1,000,000 after a useful
life of 10 years.
Which method will give the highest total depreciation after 6 years?
a. Sinking fund (i=5%) b. SYDM
9. Which method will give highest annual depreciation on the 6th year?
a. Sinking fund (i=5%) b. DBM
10. The BV at the end of year four (BV4) is the cost basis less depreciation charges in years one through
four:
a. P17,280 b. P 12,780 c. P18,720 d. P12,820
11. A company purchased a machine for P800,000, used it for 4 years and sold it for P300,000. If
money is worth 10% determine the capital recovery cost of operating the equipment.
a. P22,793.67 . P47,026 c. P33,113 d. P23,600
12. A certain equipment costs P 250,000, lasts 10 years with a salvage value of P25,000. Money is
worth 8%. If the owner decides to sell it after using for 5 years, what should his price be so that
he can recover his investment plus interest?
a. P222,793.67 b. P247,026 c. P133,113 d. P252,638

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13. A company purchased an equipment for P 110,000. It is estimated that it will have a useful life of 10 years,
production of 100,000 units and working hours of 100,000. The scrap value of the equipment is P10,000,
The company uses the equipment for 7,000 hours and produces 8,000 units on its first year of operation and
8,000 hours and 9,500 units on its second year of operation.

a. Compute the book value of the equipment at the beginning of the third year using. Declining-balance method.
a. P68,096 b. P70,400 c. P 95,000 d. P60,789

b. Double-declining-balance method
a. P68,096 b. P70,400 c. P 95,000 d. P60,789

c. Sinking-fund method, i=6%

a. P68,096 b. P70,400 c. P 95,000 d. P94,371

d. Working hours
a. P68,096 b. P70,400 c. P 95,000 d. P94,371

e. Output method
a. P68,096 b. P70,400 c. P 95,000 d. P92,500

f. MACRS, assume recovery period of 5 years.

a. P52,800 b. P70,400 c. P 95,000 d. P94,371

g. SYDM
a. P52,800 b. P70,400 c. P 74,455 d. P75,455

14. A firm purchased and placed in service a new piece of semi-conductor equipment The cost basis for the
equipment is P100,000.
a. Determine the depreciation charge permissible in the 3rd year. Use Modified Accelerated Cost Recovery
System (MACRS)
a. P 10,126 b. P 12,131 c. P11,825 d. P19,200

b. What is the book value at the end of the 3rd year (BV3)?
a. P 10,126 b. P 12,131 c. P11,825 d. P28,800ni

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