Question

Assume that Ernesto purchased a laptop computer on July 10 of year 1 for $3,000. In year 1, 80 percent of his computer usage was for his business and 20 percent was for computer gaming with his friends. This was the only asset he placed in service during year 1. Ignoring any potential §179 expense and bonus depreciation, answer the questions for each of the following alternative scenarios: (Use MACRS Table 1, Table 2.) (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount. Leave no answer blank. Enter zero if applicable.)

a. What is Ernesto's depreciation deduction for the computer in year 1?

b. What would be Ernesto's depreciation deduction for the computer in year 2 if his year 2 usage was 75 percent business and 25 percent for computer gaming?

c. What would be Ernesto's depreciation deduction for the computer in year 2 if his year 2 usage was 45 percent business and 55 percent for computer gaming?

d. What would be Ernesto’s depreciation deduction for the computer in year 2 if his year 2 usage was 30 percent business and 70 percent for computer gaming?

Answer 1

a)

Description	Amount	Explanation
(1) Original basis of laptop	$3000	Assumed in problem
(2) MACRS depreciation rate	20%	5-yr prop, yr. 1, ½ yr. convention
(3) Full MACRS depreciation expense	$600	(1) × (2)
(4) Business use percentage	80%	Assumed in the problem
Depreciation deduction for year	480	(3) x (4)

b)

Description	Amount	Explanation
(1) Original basis of laptop	$3000	Assumed in problem
(2) MACRS depreciation rate	20%	5-yr prop, yr. 1, ½ yr. convention
(3) Full MACRS depreciation expense	$600	(1) × (2)
(4) Business use percentage	80%	Assumed in the problem
Depreciation deduction for year	480	(3) x (4)

c)

$30.Because his business usage is below 50%, Ernesto must use the straight-line method to determine depreciation.Using this method, his depreciation expense for year2 is $270. However, because his business usage dropped from above to below 50%, he must also recalculate prior year depreciation using the straight line method. Any accelerated depreciation that he claimed in the prior year in excess of the straight-line amount for that prior year reduces the $270 of depreciation expense for year 2. In this case, the excess $240 depreciation reduces the $270, leaving $30 of depreciation expense as computed below

Description	Amount	Explanation
(1) Straight-line depreciation in current Year	$270	$3,000/5 years x 45% Business
(2) Prior year straight-line depreciation	$240	$3,000/5 x ½ year convention x 80% business use percentage
(3) Prior year accelerated depreciation	$480	From part “a” above
(4) Excess accelerated depreciation	$240	(3) – (2)
Current year depreciation deduction	$30	(1) – (4)