A general contractor purchases a new excavator for $85,000. Using the MACRS 5-year depreciation schedule, what is the depreciation amount for the first year if the first-year rate is 20%?
Correct Answer
A) $17,000
Using the MACRS 5-year schedule at 20% for the first year: $85,000 × 0.20 = $17,000. This is the standard depreciation method for construction equipment.
Why This Is the Correct Answer
The MACRS 5-year depreciation schedule applies a 20% rate in the first year for construction equipment like excavators. The calculation is straightforward: multiply the equipment cost by the first-year depreciation rate. This gives us $85,000 × 0.20 = $17,000. MACRS is the standard depreciation method required by the IRS for business equipment, making this the correct approach for tax and accounting purposes.
Why the Other Options Are Wrong
Option B: $14,500
This amount ($14,500) would result from applying approximately a 17% rate instead of the correct 20% first-year MACRS rate, or possibly from incorrectly calculating straight-line depreciation.
Option C: $21,250
This amount ($21,250) would result from applying a 25% rate, which is not the correct first-year MACRS percentage for 5-year property. This might be confusion with a different depreciation schedule.
Option D: $16,000
This amount ($16,000) would result from applying approximately an 18.8% rate, which is not the standard MACRS first-year rate and appears to be an arbitrary calculation error.
Memory Technique
Remember 'MACRS 5-year starts with 20%' - think 'M5-20' as a code. Construction equipment like excavators almost always fall under the 5-year MACRS schedule.
Reference Hint
Look up 'MACRS Depreciation Tables' or 'Modified Accelerated Cost Recovery System' in the tax/accounting section of your reference materials, specifically the 5-year property schedule.
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