Question

Required information (The following information applies to the questions displayed below.] At the beginning of the current year, Poplock began a calendar-year dog boarding business called Griff's Palace. Poplock bought and placed in service the following assets during the year: Cost Date Asset Acquired Basis Computer equipment Dog-grooming furniture Pickup truck Commercial building Land (one acre) 3/23 9,800 11,800 10,000 318,000 5/12 9/17 10/11 10/11 128,000 Assuming Poplock does not elect $179 expensing and elects not to use bonus depreciation, answer the following questions: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.) a. What is Poplock's year 1 depreciation deduction for each asset? Depreciation Deduction Asset Computer equipment Dog grooming furniture Pickup truck Commercial building Land 2$ Total

Answer 1

Here are the particulars of the question based on MACRS Standard.

ASSET                                                           DATE                                     BOOK VALUE                      LIFE                                        DEP. CONVERSION           RATE OF DEP

Computer equipment                3/23                         9,800                       5 years                     Mid-Quarterly          200% DB

Dog grooming furniture             5/12                         11,800                     7 years                     Mid-quarterly           200% DB

Pickup truck                              9/17                         10,000                     5 years                     Mid-quarterly           200% DB

Commercial building                 10/11                       318,000                   39 years                   Mid-quarterly           SL

Land (one acre)                         10/11                       128,000                   39 years                   Mid-quarterly           SL

DB- Declining Balance, SL – Straight Line

Solution

40% test for Mid Quarterly

If the total cost of business equipment acquired in the last quarter of the year exceeds 40% of the total cost of equipment acquired for the entire year, the mid-quarter convention must be used for all property placed in service in that tax year.

In this question we will be using Mid Quarterly conversion for all the assets since assets placed in service in the last quarter Q4 (October, November and December) has a combined value of greater than 40% of the total assets.

1. Total assets = 477,600
2. Q4 Assets = 446,000

B/A                                = 446,000/477,600 x 100 = 93.38%

MACRS Table 2,3,4 & 5 will be used for Mid quarterly conversion for assets placed in Q1, Q2, Q3 and Q4 respectively.

Assuming that the business has started in 2019 and assets had 100% utilisation in the business, let us calculate depreciation deduction for year 1 and 2.

Depreciation Deduction calculation for year 1

Asset                                                       Adjusted Basis       Rate                        Dep. Deduction      Method   Book Value

Computer equipment                                9,800                       25.00 %                    2,450                       DB            7,350

Dog grooming furniture                             11,800                     17.86 %                    2,107                       DB            9,693

Pickup truck                                              10,000                     05.00 %                    500                          DB            9,500

Commercial building                                 318,000                   00.32 %                    1,019                       SL             316,981  

Land (one acre)                                         128,000                   00.32 %                    410                          SL             127,590

Total Depreciation Deduction for year 1 = 6,486

Depreciation Deduction calculation for year 2

Asset                                                       Adjusted Basis       Rate                        Dep. Deduction Method   Book Value

Computer equipment                                7,350                       30.00 %                    2,940                       DB            4,410

Dog grooming furniture                             9,693                       23.47 %                    2,769                       DB            6,923

Pickup truck                                              9,500                       38.00 %                    3,800                       DB            5,700

Commercial building                                 316,981                   02.56 %                    8,154                       SL             308,827  

Land (one acre)                                         127,590                   02.56 %                    3,282                       SL             124,308

Total Depreciation Deduction for year 2 = 20,945

* All the figures are in US Dollars.