Question

What conversion is used for the year of disposition for a warehouse

Answer 1

Answer:

Mid-month convention for year of disposition. Businesses deduct one-half of a month’s depreciation in the month they sell or otherwise dispose of real property. For example, if Teton sold its warehouse on March 5 of year 2, it would deduct two and one-half months of depreciation in that year for the warehouse (depreciation for January, February, and one-half of March). Calculating depreciation expense in the year of sale or disposition for mid-month convention assets is similar to the calculation under the mid-quarter convention. When the mid-month convention applies, the asset is treated as though it is sold in the middle of the month of which it was actually sold. The simplest process for calculating mid-month convention depreciation for the year of sale consists of the following four steps:

Step 1: Determine the amount of depreciation expense for the asset as if the asset was held for the entire year.

Step 2: Subtract one-half of a month from the month in which the asset was sold (if sold in third month, subtract .5 from 3 to get 2.5). (Subtract half of a month because the business is treated as though the asset was dis-posed of in the middle of the third month—not the end.)

Step 3: Divide the amount determined in Step 2 by 12 months (2.5/12). This is the fraction of the full year’s depreciation the business is eligible to deduct.

Step 4: Multiply the Step 3 outcome by the full depreciation determined in Step 1.

These steps are summarized in the following formula:

Mid-month depreciation for year of disposition 5Full year’s depreciation31Month in which asset was disposed of 2.52