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 C: $14,500
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: $21,250
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.
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.
More Business & Finance Questions
A general contractor purchases equipment worth $45,000 with a useful life of 9 years and no salvage value. Using straight-line depreciation, what is the annual depreciation expense?
What is the typical recommended coverage amount for general liability insurance for a small to medium-sized general contracting business?
A contractor estimates startup costs of $75,000 for equipment, $25,000 for initial inventory, $15,000 for insurance premiums, and $10,000 for working capital. They can finance 70% of the total. How much cash do they need?
When establishing professional relationships with architects and engineers, what is the most important factor for a general contractor to consider?
A partnership agreement for a construction company should address all of the following EXCEPT:
A contractor purchases a truck for $60,000. After 5 years, it has accumulated depreciation of $35,000. What is the truck's book value?
A contractor's business plan projects first-year revenue of $500,000 with a 15% net profit margin. If actual revenue is $450,000 with the same profit margin, what is the variance in net profit?
Using the Modified Accelerated Cost Recovery System (MACRS), construction equipment is typically depreciated over how many years?
A contractor is comparing financing options for equipment purchase. Option A: $80,000 cash purchase. Option B: $20,000 down, $65,000 financed at 6% for 4 years. What is the total cost of Option B?
A contractor purchases equipment using a capital lease with a present value of $120,000. How should this be recorded on the balance sheet?
People Also Study
Related Study Resources
Previous Question
A contractor owns equipment worth $850,000 with annual depreciation of $95,000, insurance of $18,000, and maintenance of $32,000. The equipment generates $180,000 annual revenue. What is the annual net return on investment?
Next Question
A project has activities with the following durations and dependencies: Activity A (5 days), Activity B (3 days, depends on A), Activity C (4 days, depends on A), Activity D (2 days, depends on B and C). What is the critical path duration?