On May 11, 2012, your calendar year firm pays $6,000 for a used computer server, its only asset purchase for the year, and estimates that the server will have a salvage value of $500. If no Section 179 deduction is taken, what is your firm’s maximum 2012 deduction for depreciation?

Calendar-Year Firm

The firm’s maximum 2012 deduction for depreciation is:

= $917.

Explanation:

a) Data and Calculations:

Purchase of a used computer server on May 11, 2012 = $6,000

Since the server is a used one, we assume a four-year useful life

Salvage value = $500

Assumed useful life = 4 years

Depreciable amount = $5,500 ($6,000 - $500)

Since the firm does not take the Section 179 Deduction, which would have allowed it to expense the whole depreciable amount this 2012, the depreciation expense for the first year is calculated as follows:

Annual depreciation expense, using the straight-line method = $1,375

For 2012, the firm's maximum deduction for depreciation will be:

= $917 ($1,375 * 8/12) (covering the months from May 11 to December 31)

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