Question

Part II. Problem (1 problem worth 20 total possible points, 4 parts worth 5 points each) 1. (5 points) On July 5, 2018, Arrow Corporation purchased a warehouse for $2,600,000, of which $650,000 was allocable to the land and $150,000 was allocable to 15-year land improvements. Due to financial problems, Arrow sold the building and the land improve- ments on November 16, 2021. Compute Arrow's allowable depreciation deductions for the warehouse and for the 15-year land improvements for both the year of purchase (2018) and the year of sale (2021) assuming that Arrow does not elect to use either Section 179 expensing or bonus depreciation for any of its asset purchases in 2018.

Answer 1

Total price of warehouse purchased = $2,600,000

Of which cost of land = $650,000. Since land has unlimited life, hence it it cannot be depreciated.

Land improvement has separate useful life of 15 years. Hence it can be depreciated over 15 years.

Total cost of land improvement = $150,000

Land improvement yearly depreciation (based on straight line) = 150,000/15 = $10,000

Remaining property value = 2,600,000 - 650,000 - 150,000 = 1,800,000

As per US tax law, This asset has 39 years useful which will depreciated using ADS straight line depreciation:

Depreciation for first year 2018= 1,800,000 /39 = $46,153

Total depreciation in 2018 and 2021 each = depreciation on land improvement + depreciation on remaining property (excl. land and land improvement)

= 10,000+ 46,153

= $56,153