Question

An asset costs $150,000 and is classified as a ten-year asset. What is the annual depreciation expense for the first three years under the straight-line and the modified accelerated cost recovery systems of depreciation?

Answer 1

Under the straight-line method, the annual depreciation expense for the first three years is $15,000. Under the modified accelerated cost recovery system, the depreciation expenses for the first three years are $30,000, $38,400, and $20,512 respectively.

Step-by-step explanation:

Under the straight-line method of depreciation, the annual depreciation expense is calculated by dividing the cost of the asset by its useful life. In this case, the asset costs $150,000 and has a ten-year life, so the annual depreciation expense would be $15,000 (150,000 / 10 = 15,000).

Under the modified accelerated cost recovery system (MACRS) of depreciation, different percentages are used to calculate depreciation expenses over specific periods. For the first three years, the depreciation expense would be 20% of the cost in the first year, 32% in the second year, and 19.2% in the third year:

1. First year: 150,000 * 20% = $30,000
2. Second year: (150,000 - 30,000) * 32% = $38,400
3. Third year: (150,000 - 30,000 - 38,400) * 19.2% = $20,512