Question

Required information [The following information applies to the questions displayed below.] DLW Corporation acquired and placed in service the following assets during the year: Date Cost Asset Acquired Basis Computer equipment 3/8 $ 12,500 Furniture 4/15 18,100 Commercial building 12/13 311,000 Assuming DLW 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.)

b. What is DLW's year 3 cost recovery for each asset if DLW sells all of these assets on 5/20 of year 3?

ASSET	YEAR 3 COST RECOVERY
COMPUTER EQUIPMENT
FURNITURE
COMMERCIAL BUILDING
TOTAL

Answer 1

Since DLW has placed more than 40% of the assets during the last quarter in the year of purchase, DLW would use the Mid quarter convention in order to depreciate its assets.

For assets depreciated using the Mid quarter convention and sold during the second quarter of the year, the assets will be depreciated using a rate of 37.5%. Hence, Computer and equipment would be charged a depreciation of 37.5% of the actual depreciation for the year.

For Commercial building, we will use the mid month convention and would be depreciated over a life of 39 years. For assets depreciated under mid month convention, the month of sale would be considered as half a month of service and the depreciation would be expensed accordingly.

Year 3
Asset	Original cost	Date placed in service	MACRS Asset Life(yrs)	MACRS Depreciation rate	Portion of Year	MACRS cost recovery
Computer equipment	12,500	03/18	5	19.20%	37.50%	900.00
Furniture	18,100	04/15	7	17.49%	37.50%	1,187.13
Commercial building	311,000	10/20	39	2.564%	37.50%	2,990.27
					Macrs Cost recovery	5,077.40

The 37.5% for Commercial building is calculated as follows:-

(January to April) = 4 months + 0.5 months of may/12 months = 4.5 months /12 months = 37.5%

MACRS Cost recovery during 3rd year = $5,077(Rounded)

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