Watson Company purchases used equipment (5-year MACRS property) for $1,100,000 on July 8, 2018. Watson does not want to use bonus depreciation. What is Watson' maximum allowable cost recovery deduction for 2018 on the equipment if this is the only purchase of equipment for 2018?
A)$940,000
B)$1,000,000
C)$1,020,000
D)$1,040,000
E)$1,100,000

Question

Quizplus · Accepted Answer

Since bonus depreciation is not being used, the MACRS table should be used to determine the depreciation expense for each year. According to the table, the MACRS percentage for 5-year property is 20%.

To determine the maximum allowable cost recovery deduction for 2018, we first need to calculate the depreciation expense for the year. Using the mid-year convention (since the equipment was purchased on July 8th), the first year depreciation expense would be:

(20% / 2) x $1,100,000 = $110,000

Therefore, Watson's maximum allowable cost recovery deduction for 2018 on the equipment is $1,110,000 - the original purchase price ($1,100,000) plus the first year depreciation expense ($110,000):

$1,100,000 + $110,000 = $1,210,000

However, the question asks for only the maximum allowable cost recovery deduction for 2018 - without including the original purchase price. So the answer is simply the first year depreciation expense:

$110,000

Therefore, the best choice is C) $1,020,000.

Watson Company Purchases Used Equipment (5-Year MACRS Property) for $1,100,000