Karl Inc. purchased only the following properties in Year 1. (1) Machine A of $1,100,000 used...

Karl Inc. purchased only the following properties in Year 1.

(1) Machine A of $1,100,000 used for business on Jan 1 (2) Machine B of $1,200,000 used for business on Oct 10

Questions: a) What is the maximum CRA for Machine A in Year 1?

b) What is the maximum CRA for Machine A in Year 2?

c) What is the maximum CRA for Machine B in Year 1?

d) What is the maximum CRA for Machine B in Year 2?

CRA= Cost recovery allowance

Solutions

Expert Solution

Requirement 1: Compute maximum cost recovery allowance as follows

The company should use seven year recovery period and mid-quarter convention because the value of machine placed in service in the fourth quarter represents 52% of the total value of machinery placed in service during the year.

Particulars	Amount	Percentage
Machine A	$1,100,000	48%
Machine B	$1,200,000	52%
Total	$2,300,000	100%

The maximum cost recovery allowance of Machine A in year one is = $275,000 ($1,100,000 × 25%).

Requirement 2: Compute maximum cost recovery allowance as follows

The maximum cost recovery allowance of Machine A in year two is = $235,730 ($1,100,000 × 21.43%).

Requirement 3: Compute maximum cost recovery allowance as follows

The maximum cost recovery allowance of Machine B in year one is = $42,840 ($1,200,000 × 3.57%).

Requirement 4: Compute maximum cost recovery allowance as follows

The maximum cost recovery allowance of Machine B in year two is = $330,600 ($1,200,000 × 27.55%).

Note: Use 7 year cost recovery rates in Table A-2 for Machine A as it is placed in service in the first quarter of the period.

Use 7 year cost recovery rates in Table A-5 for Machine B as it is placed in service in the fourth quarter of the period.

Assumed that the company has not elected section 179 expense and bonus depreciation as nothing is mentioned in the question.

ekkarill92 answered 1 year ago

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