Dependable Motors just purchased some MACRS five-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. Which one of the following will correctly give you the book value of this equipment at the end of Year 2? Multiple Choice $216,000(1 − .2 − .32) [$216,000(1 − .20)](1 − .32) $216,000/(1 + .2 + .32) $216,000[(1 + .20)(1 + .32)] $216,000(.20 + .32)

A

Explanation:

In this question, we are asked to select the option that correctly gives the book value of the equipment at the end of the second year.

Firstly, we identify the cost of property, which is the cost at which the MARCS were bought. This is $216,000

The rates of the MARCS for the first, second and third years are given by 0.2, 0.32 and 0.192 respectively.

We proceed to calculate the depreciation for the first and second years.

For the first year, depreciation = Rate * Cost of Property = 0.2 * 216,000 = $43,200

For the second year, depreciation = Cost of property * rate = 216,000 * 0.32 = $69,120

We now add the depreciations for the two years:

Total depreciation for years 1 and 2 is : $69,120 + $43,200 = $112,320

At the end of year 2, the book value of the property will be $216,000 - $112,320 = $103,680

Option A corresponds to this value

Check:

216,000(1-0.2-0.32) = 216000(0.48) = $103,680

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