A contractor uses the Modified Accelerated Cost Recovery System (MACRS) for a $90,000 piece of equipment with a 5-year recovery period. If the first-year rate is 20%, what is the first-year depreciation?
Correct Answer
B) $18,000
MACRS first-year depreciation = $90,000 × 20% = $18,000. MACRS uses predetermined percentages that differ from straight-line depreciation and are designed for tax purposes.
Why This Is the Correct Answer
The MACRS depreciation calculation is straightforward multiplication of the equipment cost by the given percentage rate. With equipment costing $90,000 and a first-year MACRS rate of 20%, the depreciation is $90,000 × 0.20 = $18,000. MACRS uses IRS-predetermined percentages that are specifically designed for tax depreciation purposes, making this a direct calculation without any adjustments needed.
Why the Other Options Are Wrong
Option A: $15,000
$15,000 would result from incorrectly using approximately 16.67% instead of the given 20% rate, possibly confusing this with straight-line depreciation over 6 years.
Option C: $20,000
$20,000 would result from incorrectly using straight-line depreciation (100% ÷ 5 years = 20% annually), but this ignores that MACRS uses specific predetermined percentages that don't follow straight-line calculations.
Option D: $22,500
$22,500 would result from incorrectly using 25% instead of the given 20% rate, possibly confusing this with a different recovery period or calculation method.
Memory Technique
Remember 'MACRS = Multiply And Calculate Right Simply' - just multiply the asset cost by the given MACRS percentage rate, no complex calculations needed.
Reference Hint
Look up 'MACRS Depreciation' or 'Modified Accelerated Cost Recovery System' in the business management or accounting sections of your reference materials.
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