Question

A group of investors has formed SandInn Corporation to purchase a small hotel. The price is $200,000 for the land and $800,000 for the hotel building. If the purchase takes place in June, compute the MACRS depreciation for the first three calendar years. Then assume the hotel is sold in June of the fourth year, compute the MACRS depreciation in that year also.

Answer 1

Answer and Explanation:

The computation of the MACRS depreciation is shown below:

In this question we assume the hotel building will be treated as a  normal building and buildings that contains 39 year assets  life

Now before that we need to do following calculations

Total cost paid initially is

= Cost of land + Cost of Hotel

= $200,000 + $800,000

= $1,000,000

Now

For 39 year assets , the depreciation rate is 1.3% in year 1 and 2.6% for all other years

And, also we know that for land no depreciation is calculated as it have unlimited life so we considered only hotel building

Now

MACRS depreciation for Year 1 is

= 0.013 × $800,000

= $10,400

MACRS depreciation for Year 2 is

= 0.026 × $800,000

= $20,800

MACRS depreciation for Year 3 is

= 0.026 × $800,000

= $20,800

So,

Total depreciation for first three years is

= $10,400 + $20,800 + $20,800

= $52,000

And,  

MACRS depreciation for Year 4 ​is

= 0.026 × $800,000

= $20,800

So,

Total depreciation for first four years is

= $10,400 + $20,800 + $20,800 + $20,800

= $72,800