Question

MACRS basic application - Assume a company that started business in 2xd purchased office furniture on February 14, 2xx3, at a price of $10,000. Further assume that this was the only purchase of assets in the year and that no special depreciation rules apply. The equipment is Office equipment classified as MACRS 7-year property. What should the company consider given that this is its only property placed in service for the year? What is the tax depreciation expense for 2xx3? What is the tax depreciation expense for 2xx4? What if, the company placed the equipment in service in November instead of February, what would need to change from the original example? Depreciation expense for 2xx3? Depreciation expense for 2xx4? Determining Cost Basis - Jose purchased a delivery van for his business through an online auction His winning bid for the van was $24,500. In addition, Jose incurred the following expenses before using the van: shipping costs of $650, paint to match the other fleet vehicles at a cost of $1,000 registration costs of $3,200, which included $3,000 of sales tax and a registration fee of $200, wash and detailing for $50, and an engine tune-up for $250.

Answer 1

The question is based on Depreciation.

Depreciation is the loss of value of an asset either due to it's usage or efflux of time.

Depreciation must be calculated on the asset from the day it is put to use whether it is used or not.

Depreciation is to be charged on every Fixed Asset whose value diminish over a period of time.

For example: Land cannot be depreciated as it increases in value over time.

Depreciation must be charged irrespective of profits or losses i.e. it is not allocation of profit but it is a charge against profit.

Kindly refer MACRS Depreciation percentage table for 5 year and 7 year depreciation percentage rate.

Details given in Question:

Office Furniture: $10,000

MACRS (Years in which the depreciation is to be charged for the asset) : 7 years

Date of purchase: 14/02/2xx3

Financial Year (Assumed): January-December 2xx3

Residual value of Office Furniture (Assumed): 0

Depreciation for 2xx3 = $10,000 x 14.29%

= $1,429

If the office furniture was purchased in the month of November'2xx3,

then Half Year Depreciation would have been given

Depreciation for 2xx3 = $10,000/ x 14.29% x 1/2

= $1,429/2

= $714

Depreciation for 2xx4 = $10,000 x 24.49% = $2,449

Jose's Delivery Van Cost

Everything that adds value and is not a recurring expense in nature can be capitalised in Cost of Fixed Asset.

Recurring expenses, however, cannot be added to cost of Fixed Asset and has to be expensed out through Profit or Loss/ Income and Expenditure A/c.

Here,

Van bid amount = $24500

+ Shipping Charges = $650

(One time cost incurred to bring asset to current location and condition and to make available for our use)

+ Painting Charges = $1000

(Assumed that it is necessary for the company and adds value to customers and expense incurred only once)

+ Registration Fees = $3200

+ Wash and Detailing = $0

(It is a recurring expense which will be incurred regularly or on yearly basis and does not add value to fixed asset hence, not added)

+ Engine Tune up = $250

Total Cost of Jose's Delivery Van = $29,600

It will come under "Automobiles" and will be depreciated over a period of 5 years.

Depreciation expense = $29,600 x 20% = $5,920

I could only understand your question upto Jose's part hence answered upto that part.