Depreciation Adjustment for an Overhauled Asset
In January 2001, Kendall Manufacturing Company purchased a new numerical control machine at a cost of $60,000. The machine had an expected life of 10 years at the time of purchase and a zero expected salvage value at the end of the 10 years.
• For book depreciation purposes, no major overhauls had been planned over the 10 year period, and the machine was being depreciated toward a zero salvage value, or $6,000 per year, with the straight line method.
• For tax purposes, the machine was classified as a 7 year MACRS property. In December 2003, however, the machine was thoroughly overhauled and rebuilt at a cost of $15,000. It was estimated that the overhaul would extend the machine’s useful life by 5 years.
(a) Calculate the book depreciation for the year 2006 on a straight line basis.
(b) Calculate the tax depreciation for the year 2006 for this machine.