On October 2,2013,Andres Corporation (a calendar year corporation)purchases and places into service new 7-year business equipment costing $35,000.No other acquisitions are made during the year.If Section 179 expensing is not elected,the maximum cost recovery for 2013 is:
A)$1,250
B)$5,002
C)$7,000
D)$18,125
E)$35,000

Question

Quizplus · Accepted Answer

Since the equipment is 7-year property, the recovery period is 7 years. Without a Section 179 election, the equipment will be depreciated using the Modified Accelerated Cost Recovery System (MACRS) with the half-year convention. The maximum cost recovery for 2013 is calculated as follows: 
$35,000 x 20% (MACRS rate for 7-year property) = $7,000 
Since the equipment was placed in service in October, only half a year of depreciation is allowed, resulting in a maximum cost recovery of $3,500 for 2013. However, since the half-year convention is a timing rule and not a method of computing depreciation, the full-year depreciation for 2014 will be calculated based on the remaining adjusted basis of $31,500 ($35,000 - $3,500).

On October 2,2013,Andres Corporation (A Calendar Year Corporation)purchases and Places