Question

1.MACRS with Trade-In: In May 2011, your company traded in a computer and peripheral equipment, used in its business, that had a BV at that time of $25,000. A new, faster computer
system having a fair market value of $300,000 was acquired. Because the vendor accepted
the older computer as a trade-in, a deal was agreed to whereby your company

would pay $225,000 cash for the new computer system.

a. What is the property class life and recovery year for the computer system?
b. Using MACRS GDS rates, how much depreciation can be deducted each year based on this class life?

Answer 1

a) MACRS means Modified Accelerated Cost Recovery System is the primary method of depreciation for fedral income tax purpose to determine depreciation deduction. it is calculated either by declining balance method or straight line method.

Normally property class life to be considered is 5 years.normally uses MACRS GDS (5 year 200% ) declining balance method to depreciation of system.

Recovery period is also the same to be considered which is over 5 year.

b) it is current system depreciation allowed in the United state to calculate tax deductions on account of deprection for depreciable assets other than intangible assets.

For calculating Depreciation in the FIRST YEAR this formulae is applied:

(COST X 1 / Useful Life ) X A X Depreciation Convention. here, A IS 100%,150%, OR 200%

FOR CALCULATING Depreciation in the subsequent year will be:

(COST - Depreciation in the previous years) X A X ( 1/ RECOVERY PERIOD)

A is same 100%, 150% ro 200%