Acorn Construction (calendar-year end C-corporation) has had rapid expansion dur

Question

Acorn Construction (calendar-year end C-corporation) has had rapid expansion during the last half of the current year due to the housing market’s recovery. The company has record income and would like to maximize their cost recovery, as much as possible, for the current year. (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Round your answer to the nearest whole dollar amount.)

Acorn provided the following information:

a. What is Acorn’s maximum cost recovery expense in the current year?

  
Maximum Total Depreciation expense: $_______________

Asset Placed in Service Basis New equipment and tools August 20 $ 800,000 Used light duty trucks October 17 1,500,000 Used machinery November 6 525,000 Total $ 2,825,000 ABLE 1 MACRS Half-Year Convention Depreciation Rate for Recovery Period 3-year 5-year 7-year 10-year 15-year 20-year Year 3.750 7.219 6.677 5.00 9.50 8.55 7.70 6.93 6.23 5.90 5.90 5.91 5.90 5.91 5.90 5.91 5.90 5.91 2.95 20.00 32.00 19.20 11.52 11.52 5.76 14.29 24.49 17.49 12.49 8.93 8.92 8.93 4.46 10.00 18.00 14.40 11.52 9.22 7.37 6.55 6.55 6.56 6.55 3.28 33.33 44.45 14.81 7.41 3 4. 5.713 5.285 4.888 4.522 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 4.462 4.461 2.231 6 8 9 10 12 13 15 16 17 18 19 20 21

Explanation / Answer

Acorn Construction must use the mid quarter convention because it places more than 40% of its assets into service in the last quarter [(1,500,000+525,000)/2,825,000 = 71.68%]. Acorn is eligible to take bonus on its new asset not on used assets.

a) Acorn's maximum cost recovery expense in the current year

Deduction under Sec 179 = $0 because the total investment in assets is of $2,825,000 which exceeds the $2,000,000 by more than $500,000. thus expense allowed under sec.179 is zero.

Calculation of Depreciation expense (Amount in $)

So the total depreciation expense is $536,583

Asset Original basis Bonus Depreciation Remaining Basis Depreciation Rate Depreciation expense New equipment and tools (7 years) 800,000 400,000 400,000 10.71% 42,840 Used light duty trucks (5 years) 1,500,000 0 1,500,000 5% 75,000 Used machinery (7 years) 525,000 0 525,000 3.57% 18,743 Total 400,000 (a) 136,583 (b) Total Depreciation Expense (a)+(b) 536,583

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