In: Accounting
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
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.