Question

Erwin Company, a calendar year taxpayer, made only two purchases of depreciable personalty this year. The first purchase was five-year recovery property costing $312,800, and the second purchase was seven-year recovery property costing $574,000. Use Table 7-2 and Appendix 7-A.

1. Compute Erwin’s first-year MACRS depreciation with respect to the personalty assuming that the first purchase occurred on February 2, and the second purchase occurred on June 18.
2. Compute Erwin’s first-year MACRS depreciation with respect to the personalty assuming that the first purchase occurred on February 2, and the second purchase occurred on October 13.

MACRS for Business Personalty (Half-Year TABLE 7.2 Convention) Recoverv Period 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year Year Depreciation Rate 1 33.33% 20.00% 14.29% 10.00% 5.00% 3.750% 18.00 9.50 2 44.45 32.00 24.49 7.219 3 14.81 19.20 14.40 6.677 7.49 8.55 12.49 11.52 7.41 11.52 7.70 11.52 6.93 5.713 5 8.93 9.22 7.37 6 5.76 8.92 6.23 5.285 8.93 6.55 5.90 4.888 8 4.46 6.55 5.90 4.522 5.91 4.462 6.56 4.461 10 6.55 5.90 3.28 5.91 4.462 12 4.461 5.90 5.91 4.462 13 14 4.461 5.90 5.91 15 4.462 4.461 16 2.95 17 4.462 18 4.461 19 4.462 4.461 20 2.231 21 Appendix 7-A Midquarter Convention Tables Midquarter Convention for Business Personalty Placed in Service in First Quarter Depreciation Rate for Recovery Period 7-Year Year 3-Year 5-Year 10-Year 5-Year 20-Year 58.33% 35.00% 25.00% 17.50% 8.75% 6.563% 2778 7000 26.00 6.482 10.56 5.130 4.746 4.459 4.459 4.459 0.82 4.459 4.459 4.460 4.459 0.74 4.460 17 4.459 4.459 0.557 Midquarter Convention for Business Personalty Placed in Service in Second Quarter Depreciation Rate for Recovery Period 10-Year 5-Year Year 3-Year 15-Year 20-Year 6.25% 41.67% 25.00% 1785% 12.50% 4.688% 30.00 23.47 38.89 14.14 18.00 14.00 6.612 7.59 6.116 11.97 11.20 5.658 5.233 4.478 3.33 4.463 12 4.463 4.463 4462 4.463 4.462 18 4.462 19 21 Midquarter Convention for Business Personalty Placed in Service in Third Quarter Depreciation Rate for Recovery Period Year 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year 1071% 3.75% 2500% 1500% 7 50% 2.81396 9.63 7.289 50.00 34.00 3 16.67 6.742 6.237 11.30 9.30 5.769 6 5.336 4.936 4.566 4.460 4.461 4.460 4.461 3.69 4.461 4.460 4.461 4.460 Midquarter Convention for Business Personalty Placed in Service in Fourth Quarter Depreciation Rate for Recovery Period 5-Year 15-Year 20-Year Year 3-Year 10-Year 8.33% 5.00% 3.57% 2.50% 1.25% 0.938% 27.55 15.60 20.37 19.68 8.89 6.872 4 10.19 13.68 14.06 6.357 5.880 7.20 5.439 4.458 12 4.458 14 5.90 4.459 3.901

Answer 1

If any fixed asset purchased by any assessee then up to the put use what ever expenses they have been incurred related to that fixed asset it should be capitalised if the usable life is more than 1 year then the Asset should be consider as Capital expense.

If useful life of an asset is less than 1 year then what ever expenses has been incurred should consider as an Revenue Expense. That entire amount should be treated as expense and it should be charging to the profit and loss account.

If useful life of an asset is more than 1 year then it is consider as an capital expense and it should be transfer to Balance sheet.

Every year on the basis of useful it should be charge depreciation from cost of asset as per Accounting Standard 10 i.e Property plant and equipment.

As per income tax act 1961, Depreciation has to be calculated and allowed such expense as per Sec 32

Central government while at the time of budget they may give special status to the certain states at that time they will give Special allowance like Investment Allowance under section 32AC i.e if any investment made during the calendar year in a specified location or specified category of business then they are allowed to get special benefits and more depreciation.

Some times government may give additional depreciation for specified category of persons and that depreciation shall need not to be reduced from the cost of asset.

Cost of Asset:: Purchase price + Transportation + Installation Expenses + Trail run Expenses - Government Grant relates to that asset - Duty Drawback - Taxes and duties which is recoverable.

Depreciation is to be Calculated from the date of put to use. Generally rate of depreciation is provided by the central government at the time of budget.

Every year we have to verify whether Carrying amount should not be more than recoverable amount if Carrying amount is more than recoverable amount then that difference should be charged to profit and loss account as an Impairment Loss.

If any asset has been purchased we have to see how many years it can be recoverable on the basis of that we have to calculate depreciation and along with on the basis of number of quarters.

Computation of Depreciation in the books of Erwin's:

1 St year

1) (a)A Purchased Feb 02 for $312,800 recovery period 5 years

Dep as per Appendix 7 A : Because mid first quarter

Dep:. 312800* 35% = $109,480

(B). June 18 purchased second asset for $ 574000 for a recovery period of 7 year. It is actually purchased in the mid of 2 nd quarter so we have to consider the depreciation rare as per appendix 7 A 2 nd mid quarter that is the rate will be 17. 85%

Depreciation value = 574000* 17.85% = 102459

Total Depreciation for the year a+ b =$ 208940

2) (a). Depreciation for first purchase is same as on 1 ( a ) i.e 109480 because it is purchased on Feb 2 and same cost and same recoverable amount.

2) ( b ). Asset purchased on October 13 and recoverable amount will be for 7 years. Actually it is purchased in the fourth quarter because of that we have to consider the rate as per appendix 7 A 4th mid quarter the rate will be 3.57%

Depreciation Value :$574000* 3.57% =$ 20492

Total Depreciation 2 ( a ) + (b) = $109480 + $20492 = $129972

Thank you