A firm has earnings of $8,000 before interest, depreciation, and taxes. A new piece of equipment is installed at a cost of $6,000. The equipment will be depreciated over five years, and the firm pays 30 percent of its earnings in taxes. What are the earnings and cash flows for the firm in years 2 and 5, using the two methods of depreciation? Use Exhibit 9.4 to answer the questions. Round your answers to the nearest dollar. Modified Accelerated Straight-line Cost Recovery Year 2 Year 5 Year 2 Year 5 Earnings before depreciation and taxes $ $ $ $ Depreciation expense Earnings after depreciation Taxes (30% tax rate) Net earnings $ $ $ $ Cash flow $ $ $ $
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A firm has earnings of $8,000 before interest, depreciation, and taxes. A new piece of equipment is installed at a cost of $6,000. The equipment will be
| Modified Accelerated | ||||||||
| Straight-line | Cost Recovery | |||||||
| Year 2 | Year 5 | Year 2 | Year 5 | |||||
| Earnings before depreciation and taxes | $ | $ | $ | $ | ||||
| Depreciation expense | ||||||||
| Earnings after depreciation | ||||||||
| Taxes (30% tax rate) | ||||||||
| Net earnings | $ | $ | $ | $ | ||||
| Cash flow | $ | $ | $ | $ |
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