Question

Champion Toys just purchased some MACRS 5-year property at a cost of $230,000. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. Assuming the firm foregoes all bonus depreciation, the book value of the asset as of the end of Year 2 can be calculated as: _______________
a. $230,000(1 − .20 − .32).
b. $230,000([1 − (.20)(.32)].
c. $230,000(1 − .20)(1 − .32).
d. $230,000/(1 − .20 − .32).
e. $230,000(.20)(.32).

Answer 1

Answer: a. $230,000(1 − .20 − .32).

Explanation:

Using the MACRS convention, the depreciation in year 2 will be sum of the first and second year depreciation rates according to MACRS.

The value of the asset in year 2 can therefore be calculated as:

= Cost * ( 1 - sum of first and second year depreciation)

= 230,000 * (1 - (20% + 32%))

Which can be written as:

= 230,000 * (1 - 20% - 32%)

Value would therefore be:

=  230,000 * (1 - 20% - 32%)

= $110,400