Year Cost × Rate = Depreciation Expense Accumulated Depreciation (End of Year) Book Value (End of Year) 1 $40,000   20.00%   $8,000     $8,000     $32,000     2 40,000   32.00%   12,800     20,800     19,200     3 40,000   19.20%   7,680     28,480     11,520     4 40,000   11.52%   4,608     33,088     6,912     5 40,000   11.52%   4,608     37,696     2,304     6 40,000   5.76%   2,304     40,000     0       Prepare a depreciation schedule showing the depreciation expense, accumulated depreciation, and book value for each year under the Modified Accelerated Cost Recovery System for a small delivery truck purchased on January 1 at a cost of $30,000 and a salvage value of $6,000. For tax purposes, assume that the truck has a useful life of five years. Use the rates from the example provided. (The IRS schedule will spread depreciation over six years.)

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Chapter1: Financial Statements And Business Decisions
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Modified Accelerated Cost Recovery System

An example of a depreciation schedule under the Modified Accelerated Cost Recovery System of depreciation is shown. The Internal Revenue Service (IRS) classifies various assets according to useful life and sets depreciation rates for each year of the asset’s life. This asset has a five year life. The MACRS rates are shown in the schedule. This example is for an asset with a cost of $40,000 and a salvage value of $4,000.

 

 

MODIFIED ACCELERATED COST RECOVERY SYSTEM


Year


Cost


×


Rate


=

Depreciation
Expense
Accumulated
Depreciation

(End of Year)

Book Value
(End of Year)
1 $40,000   20.00%   $8,000     $8,000     $32,000    
2 40,000   32.00%   12,800     20,800     19,200    
3 40,000   19.20%   7,680     28,480     11,520    
4 40,000   11.52%   4,608     33,088     6,912    
5 40,000   11.52%   4,608     37,696     2,304    
6 40,000   5.76%   2,304     40,000     0    

 

Prepare a depreciation schedule showing the depreciation expense, accumulated depreciation, and book value for each year under the Modified Accelerated Cost Recovery System for a small delivery truck purchased on January 1 at a cost of $30,000 and a salvage value of $6,000. For tax purposes, assume that the truck has a useful life of five years. Use the rates from the example provided. (The IRS schedule will spread depreciation over six years.)

Computer
Depreciation Schedule
On January 1
Accumulated
Depreciation Book Value
Year Depreciable Cost x Rate (%) = Depreciation Expense
End of Year
End of Year
2
3
4
5
Transcribed Image Text:Computer Depreciation Schedule On January 1 Accumulated Depreciation Book Value Year Depreciable Cost x Rate (%) = Depreciation Expense End of Year End of Year 2 3 4 5
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Meaning of  Modified Accelerated Cost Recovery System (MACRS)

The modified accelerated cost recovery system (MACRS) is a depreciation system used for tax purposes in the U.S. MACRS depreciation allows the capitalized cost of an asset to be recovered over a specified period via annual deductions. The MACRS system puts fixed assets into classes that have set depreciation periods.

 

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Section 179 Deduction and Modified Accelerated Cost Recovery System (MACRS) Depreciation
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