Question

COST RECOVERY AND NETTING QUIZ AJ started a small business a year ago (i.e., this is the SECOND year of operations). He purchased the following assets to use in the business: Estimated Selling Price (12/31/x2) Cost (1/1/xl) Machinery $1,500,000 $55,000 $1,650,000 Land $62,000 Warehouse $120,000 $127,000 In addition to the above assets that are used in the business, AJ purchased 1,000 shares of stock to be held as an investment for the business. He paid $15,000 for the stock. The estimated market value of the stock as of 12/31/x2 is $10,000. AJ always elects to maximize deductions whenever possible. The estimated operating income from the business in x2 is $85,000. AJ's tax rate on ordinary income is 25% and all capital gains are taxed at 15%. AJ has decided to begin a new career and, therefore, intends to sell all of the assets in his business (on 12/31/x2). Answer ALL SIX of the following questions. Please write NEATLY. If I can't read your answer, you don't get credit. 1. What are AJ's CURRENT YEAR (YEAR 2) cost recovery deductions? SHOW YOUR WORK OR YOU WILL NOT BE GIVEN CREDIT, EVEN IF YOU HAVE THE CORRECT ANSWER.

Answer 1

Note :	Following calculations are made on the basis of best assumptions can be made as per the information provided in given problems. The answer might be different as answers provided by other expert on the basis of different assumptions taken by other expert.
ANSWER-1
	Note 1 : Straight line of depreciation is used in calculation Therefore cost recovery will be same every year
	Note 2 : You cannot depreciate the cost of land because land does not wear out, become obsolete, or get used up
	Note 2 : Sale of asset will not effect to basis
	Year 1 Cost Recovery Deductions
					Amount In "$"
S.No.	Assets	Useful Life as per IRS	Unadjusted amount (A)	Depreciation (Cost Recovery)-(B=A/Useful life)	Adjusted Amount (B-A)
1	Machinery	5 Years	1500000	300000	1200000
2	Land	Not Depreciable	55000	0	55000
3	Warehouse	27.5 Years	120000	4364	115636
	Total		1675000	304364	1370636
	Current year (Year 2) Cost Recovery Deductions
S.No.	Assets	Useful Life as per IRS	Unadjusted amount (A)	Depreciation (Cost Recovery)-(B)	Adjusted Amount (B-A)
1	Machinery	5 Years	1200000	300000	900000
2	Land	Not Depreciable	55000	0	55000
3	Warehouse	27.5 Years	115636	4364	111273
	Total		1370636.364	304364	1066273