Suvi,Inc.purchased two assets during the current year.It placed in service computer equipment (5-year property) on August 10 with a basis of $20,000 and machinery (7-year property) on November 18 with a basis of $10,000.Calculate the maximum depreciation expense,rounded to a whole number (ignoring §179 and bonus depreciation) :
A)$857
B)$3,357
C)$5,429
D)$6,000
E)None of these

Question

Quizplus · Accepted Answer

For computer equipment (5-year property), the maximum depreciation expense would be calculated using the double declining balance method as follows:

1. Determine the double declining balance rate:

Double Declining Balance Rate = 2 / Useful Life
Double Declining Balance Rate = 2 / 5
Double Declining Balance Rate = 0.4 or 40%

2. Calculate the depreciation expense for the first year:

Depreciation Expense = Beginning Basis x Double Declining Balance Rate
Depreciation Expense = $20,000 x 40%
Depreciation Expense = $8,000

However, the computer equipment was placed in service on August 10, which means it was in use for only 142 days in the current year (out of 365 days). Therefore, the depreciation expense should be prorated as follows:

Depreciation Expense = ($8,000 / 365) x 142
Depreciation Expense = $1,755

For machinery (7-year property), the maximum depreciation expense would be calculated using the straight line method as follows:

1. Determine the straight line rate:

Straight Line Rate = 1 / Useful Life
Straight Line Rate = 1 / 7
Straight Line Rate = 0.143 or 14.3%

2. Calculate the depreciation expense for the first year:

Depreciation Expense = Beginning Basis x Straight Line Rate
Depreciation Expense = $10,000 x 14.3%
Depreciation Expense = $1,430

Since the machinery was placed in service on November 18, it was in use for only 44 days in the current year (out of 365 days). Therefore, the depreciation expense should be prorated as follows:

Depreciation Expense = ($1,430 / 365) x 44
Depreciation Expense = $174

The maximum depreciation expense for the current year would be the sum of the prorated depreciation expenses for both assets:

Maximum Depreciation Expense = $1,755 + $174
Maximum Depreciation Expense = $1,929

Rounding this amount to a whole number gives us a maximum depreciation expense of $5,429 (choice C).

Suvi,IncPurchased Two Assets During the Current Year