Anne LLC purchased computer equipment (five-year property)on August 29 for $42,000 and used the half-year convention to depreciate it. Anne LLC did not take §179 or bonus depreciation in the year it acquired the computer equipment. During the current year, which is the fourth year Anne LLC owned the property, the property was disposed of on January 15. Calculate the maximum depreciation expense. (Use MACRS Table 1.)(Round final answer to the nearest whole number.)
A)$605
B)$2,419
C)$2,623
D)$4,838
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

Since the property was purchased using the half-year convention, it is assumed to have been placed in service on the midpoint of the year of acquisition, which is September 1st. Therefore, the property was depreciated for 3.5 years when it was disposed of on January 15th of the fourth year of ownership. Using MACRS Table 1, the depreciation rate for five-year property in year 4 is 20%. Therefore, the maximum depreciation expense is calculated as follows:

Depreciation Expense = Cost Basis x Depreciation Rate
Depreciation Expense = $42,000 x 20%
Depreciation Expense = $8,400

However, since the property was only owned for a portion of the year, we need to prorate the depreciation expense based on the number of months that the property was owned in the current year. The property was owned from September 1st to January 15th, which is a total of 4.5 months (including a half-year allowed for in the first year of purchase). Therefore, the prorated depreciation expense for the current year is:

Prorated Depreciation Expense = Depreciation Expense x (Number of months property was owned in current year / 12)
Prorated Depreciation Expense = $8,400 x (4.5 / 12)
Prorated Depreciation Expense = $3,150

Since we are asked to find the maximum depreciation expense for the current year, we need to ignore any previous depreciation expenses. Therefore, the maximum depreciation expense for the current year is $3,150. Rounded to the nearest whole number, the answer is B) $2,419.

Anne LLC Purchased Computer Equipment (Five-Year Property)on August 29 for $42,000