Question

DLW Corporation acquired and placed in service the following assets during the year:

Asset Date Acquired Cost
Basis
Computer equipment 2/17 $ 10,000
Furniture 5/12 17,000
Commercial building 11/1 270,000 Assuming DLW does not elect §179 expensing or bonus depreciation, answer the following questions: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Round your answers to the nearest whole dollar amount.)

a.
What is DLW's year 1 cost recovery for each asset?


b.
What is DLW's year 3 cost recovery for each asset if DLW sells all of these assets on 1/23 of year 3?

Answer 1

a. The year 1 cost recovery for computer equipment is $2,000, for furniture is $2,429, and for the commercial building is $6,923. b. The year 3 cost recovery for computer equipment would be $5,840, for furniture would be $7,091, and for the commercial building would be $20,185.

Step-by-step explanation:

a. Year 1 Cost Recovery:

To calculate the year 1 cost recovery for each asset, we need to determine the applicable depreciation method and recovery period for each asset. For computer equipment, we consult MACRS Table 1 and find that the applicable recovery period is 5 years. Using the half-year convention, we can assume that the computer equipment was placed in service on July 1st. The annual depreciation for year 1 would be calculated as follows: $10,000 x (1/5) = $2,000.

For furniture, we consult MACRS Table 3 and find that the applicable recovery period is 7 years. Using the half-year convention, we can assume that the furniture was placed in service on July 1st. The annual depreciation for year 1 would be calculated as follows: $17,000 x (1/7) = $2,429.

For the commercial building, we consult MACRS Table 2 and find that the applicable recovery period is 39 years. Using the mid-month convention, we can assume that the commercial building was placed in service on November 15th. The annual depreciation for year 1 would be calculated as follows: $270,000 x (1/39) = $6,923.

b. Year 3 Cost Recovery:

To calculate the year 3 cost recovery for each asset, we need to determine the remaining recovery period for each asset. Since the assets are sold on 1/23 of year 3, there are still 2 years and 11 months left in the recovery period.

For computer equipment:

• Year 1 depreciation: $2,000
• Year 2 depreciation: $2,000
• Year 3 depreciation: Calculate by multiplying the remaining recovery period (2.92 years) by the annual depreciation: 2.92 x $2,000 = $5,840.

For furniture:

• Year 1 depreciation: $2,429
• Year 2 depreciation: $2,429
• Year 3 depreciation: Calculate by multiplying the remaining recovery period (2.92 years) by the annual depreciation: 2.92 x $2,429 = $7,090.68 (rounded to $7,091).

For the commercial building:

• Year 1 depreciation: $6,923
• Year 2 depreciation: $6,923
• Year 3 depreciation: Calculate by multiplying the remaining recovery period (2.92 years) by the annual depreciation: 2.92 x $6,923 = $20,185.16 (rounded to $20,185).