Question

Your company just bought a new piece of automotive manufacturing equipment (asset class 13.3), which will be depreciated under MACRS (GDS) with a recovery period of 10 years. Given a cost basis of $91,000, please answer the following questions: a) How much does the asset depreciate in Year 2? b) What is the cumulative depreciation up to and including Year 5? c) What is the book value at the end of Year 7? d) If the asset is sold in Year 8, what is the allowable depreciation in that year? 20-year Depreciation Rate for Recovery Period Year 3-year 5-year 7-yeara 10-yeara 15-year 1 0.3333 0.2000 0.1429 0.1000 0.0500 2 0 .44450.3200 0.2449 0.18000 .0950 a) How much does the asset depreciate in Year 2? $ (Round to the nearest dollar - no decimal places) 0.0375 0.0722 b) What is the cumulative depreciation up to and including Year 5? $ (Round to the nearest dollar - no decimal places) c) What is the book value at the end of Year 7? $ (Round to the nearest dollar - no decimal places) d) If the asset is sold in Year 8, what is the allowable depreciation in that year? $ (Round to the nearest dollar - no decimal places) Enter your answer in each of the answer boxes.

Answer 1

The depreciation expense for the asset under the MACRS table can be prepared as follows:-

Year	Amount to be depreciated	Depreciation factor	Depreciation expense	Accumulated Depreciation
1	91,000	0.1000	9,100	9,100
2	91,000	0.1800	16,380	25,480
3	91,000	0.1440	13,104	38,584
4	91,000	0.1152	10,483	49,067
5	91,000	0.0922	8,390	57,457
6	91,000	0.0737	6,707	64,164
7	91,000	0.0655	5,961	70,125
8	91,000	0.0655	5,961	76,085
9	91,000	0.0656	5,970	82,055
10	91,000	0.0655	5,961	88,015
11	91,000	0.0328	2,985	91,000

Based on the table calculated above, we can answer the following questions:-

Requirement 1:-

How much does the asset Depreciate in Year 2?

The Depreciation for the asset in Year 2 is $16,380 based on the table above.

Requirement 2:-

What is the cumulative depreciation upto and including Year 5?

The cumulative depreciation upto and including Year 5 is $57,457 (Accumulated Depreciation column for year 5)

Requirement 3:-

What is the book value at the end of Year 7?

Book value of the asset = Cost of the asset - Accumulated depreciation at the end of year 7

Book value = $91,000 - $70,125

Book Value at the end of Year 7 = $20,875

Requirement 4:-

If the asset is sold in Year 8, what is the allowable depreciation in that year?

Per IRS, if the asset is sold before the end of its useful life, the depreciation expense charged for that year will be 50% of the actual depreciation expense incurred during that year.

Hence, Depreciation expense for Year 8 = $5,961 (per table above) * 50%

Depreciation expense for Year 8 = $2,981(Rounded)