Question

DLW Corporation acquired and placed in service the following assets during the year:

Asset	Date Acquired	Cost Basis
Computer equipment	3/1	$18,300
Furniture	1/16	18,800
Commercial building	8/26	323,000

Assuming DLW does not elect S179 expensing or bonus depreciation, answer the following question:

1. What is DLW's year 3 cost recovery for each asset if DLW sells all of these assets on 2/22 of year 3?

Answer 1

THe MACRS Year 3 cost recovery for Year 3 is as follows:-

Asset	Original cost	Date placed in service	MACRS Asset Life(yrs)	MACRS Depreciation rate	Portion of Year	MACRS cost recovery
Computer Equipment	18,300	03/01/Year 1	5	19.20%	50%	1,756.80
Furniture	18,800	01/16/Year 1	7	17.49%	50%	1,644.06
Commercial Building	323,000	08/26/Year 1	39	2.564%	12.50%	1,035.22
					Total	4,436.08

The MACRS Cost Recovery during Year 3 is $4,436.08

MACRS Cost Recovery = $4,436

Please note that we use Half Year convention for Computer Equipment and Furniture convention because the company did not place more than 40% of the assets in the last quarter during the year of purchase. As per Half year convention , the depreciation expense would be 50% of the actual depreciation during the year of sale. As such, the portion of year for Computer Equipment and furntiure is 50% during the 3rd year.

For Commercial building, we use the mid month convention as it is a non residential building. Under mid month convention, the portion of the year the asset was is service is calculated as :- No.of full months of asset in service + Half month(the month the asset was sold).

Since asset was sold in february, the total months of service during Year 3 = 1 month + 0.5 months = 1.5 months.

Portion of the year for commercial building = 1.5/12 months = 12.5%