Bundle: Accounting, Chapters 1-13, 26th + Working Papers, Chapters 1-17 For Warren/reeve/duchac's Accounting, 26th And Financial Accounting, 14th + ... For Warren/reeve/duchac's Accounting, 26th
26th Edition
ISBN: 9781337498159
Author: Carl Warren, Jim Reeve, Jonathan Duchac
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 10, Problem 10.3CP
Effect of
Tuttle Construction Co. specializes in building replicas of historic houses. Tim Newman, president of Tuttle Construction, is considering the purchase of various items of equipment on July 1, 2014, for $400,000. The equipment would have a useful life of five years and no residual value. In the past, all equipment has been leased. For tax purposes, Tim is considering depreciating the equipment by the straight-line method. He discussed the matter with his CPA and learned that, although the straight-line method could be elected, it was to his advantage to use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes. He asked for your advice as to which method to use for tax purposes.
1. Compute depreciation for each of the years (2014, 2015, 2016, 2017, 2018, and 2019) of useful life by (a) the straight-line method and (b) MACRS. In using the straight-line method, one-half year’s depreciation should be computed for 2014 and 2019. Use the MACRS rates presented in Exhibit 9.
2. Assuming that income before depreciation and income tax is estimated to be $750,000 uniformly per year and that the income tax rate is 40%, compute the net income for each of the years 2014, 2015, 2016, 2017, 2018, and 2019 if (a) the straight-line method is used and (b) MACRS is used.
3. What factors would you present for Tim’s consideration in the selection of a depreciation method?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Dungan Corporation is evaluating a proposal to purchase a new drill press to replace a less efficient machine presently in use. The cost of the new equipment at time 0, including delivery and installation, is $260,000. If it is purchased, Dungan will incur costs of $7,400 to remove the present equipment and revamp its facilities. This $7,400 is tax deductible at time 0.
Depreciation for tax purposes will be allowed as follows: year 1, $64,000; year 2, $94,000; and in each of years 3 through 5, $54,000 per year. The existing equipment has a book and tax value of $124,000 and a remaining useful life of 10 years. However, the existing equipment can be sold for only $64,000 and is being depreciated for book and tax purposes using the straight-line method over its actual life.
Management has provided you with the following comparative manufacturing cost data.
Present Equipment
New Equipment
Annual capacity (units)
424,000
424,000
Annual costs:
Labor
$
60,000…
Dungan Corporation is evaluating a proposal to purchase a new drill press to replace a less efficient machine presently in use. The cost of the new equipment at time 0, including delivery and installation, is $260,000. If it is purchased, Dungan will incur costs of $7,400 to remove the present equipment and revamp its facilities. This $7,400 is tax deductible at time 0.
Depreciation for tax purposes will be allowed as follows: year 1, $64,000; year 2, $94,000; and in each of years 3 through 5, $54,000 per year. The existing equipment has a book and tax value of $124,000 and a remaining useful life of 10 years. However, the existing equipment can be sold for only $64,000 and is being depreciated for book and tax purposes using the straight-line method over its actual life.
Management has provided you with the following comparative manufacturing cost data.
Present Equipment
New Equipment
Annual capacity (units)
424,000
424,000
Annual costs:
Labor
$
60,000…
For specialized devices for use with its latest GPS / GIS system, Freeman Engineering charged $28,500. Using MACRS depreciation, the equipment was depreciated over a 3 year recovery period. After 2 years, the company sold the equipment for $5000 when it bought an improved system. (a) Assess the value of the recapture of depreciation or the capital loss involved in the asset sale. (b) What tax impact is that number going to have?
Chapter 10 Solutions
Bundle: Accounting, Chapters 1-13, 26th + Working Papers, Chapters 1-17 For Warren/reeve/duchac's Accounting, 26th And Financial Accounting, 14th + ... For Warren/reeve/duchac's Accounting, 26th
Ch. 10 - ONeil Office Supplies has a fleet of automobiles...Ch. 10 - Prob. 2DQCh. 10 - Prob. 3DQCh. 10 - Prob. 4DQCh. 10 - Immediately after a used truck is acquired, a new...Ch. 10 - Keyser Company purchased a machine that has a...Ch. 10 - Is it necessary for a business to use the same...Ch. 10 - Prob. 8DQCh. 10 - For some of the fixed assets of a business, the...Ch. 10 - a. Over what period of time should the cost of a...
Ch. 10 - Straight-line depreciation A building acquired at...Ch. 10 - Straight-line depreciation Equipment acquired at...Ch. 10 - Units-of-activity depreciation A truck acquired at...Ch. 10 - Units-of-activity depreciation A tractor acquired...Ch. 10 - Double declining-balance depreciation A building...Ch. 10 - Double-declining-balance depreciation Equipment...Ch. 10 - Revision of depreciation Equipment with a cost of...Ch. 10 - Revision of depreciation A truck with a cost of...Ch. 10 - Capital and revenue expenditures On February 14,...Ch. 10 - Capital and revenue expenditures On August 7,...Ch. 10 - Sale of equipment Equipment was acquired at the...Ch. 10 - Sale of equipment Equipment was acquired at the...Ch. 10 - Prob. 10.7BPECh. 10 - Prob. 10.7APECh. 10 - Prob. 10.8BPECh. 10 - Prob. 10.8APECh. 10 - Prob. 10.9APECh. 10 - Prob. 10.9BPECh. 10 - Costs of acquiring fixed assets Melinda Stoffers...Ch. 10 - Prob. 10.2EXCh. 10 - Determining cost of land Northwest Delivery...Ch. 10 - Prob. 10.4EXCh. 10 - Prob. 10.5EXCh. 10 - Capital and revenue expenditures Quality Move...Ch. 10 - Nature of depreciation Tri-City Ironworks Co....Ch. 10 - Prob. 10.8EXCh. 10 - Prob. 10.9EXCh. 10 - Prob. 10.10EXCh. 10 - Depreciation by units-of-output method Prior to...Ch. 10 - Depreciation by two methods A John Deere tractor...Ch. 10 - Depreciation by two methods A storage tank...Ch. 10 - Partial-year depreciation Sandblasting equipment...Ch. 10 - Revision of depreciation A building with a cost of...Ch. 10 - Capital expenditure and depreciation; parital-year...Ch. 10 - Entries for sale of fixed asset Equipment acquired...Ch. 10 - Prob. 10.18EXCh. 10 - Depletion entries Big Sky Mining Co. acquired...Ch. 10 - Prob. 10.20EXCh. 10 - Book value of fixed assets Apple Inc. designs,...Ch. 10 - Balance sheet presentation List the errors you...Ch. 10 - Prob. 10.24EXCh. 10 - Prob. 10.23EXCh. 10 - Asset traded for similar asset A printing press...Ch. 10 - Prob. 10.26EXCh. 10 - Entries for trade of fixed asset On July 1, Twin...Ch. 10 - Entries for trade of fixed asset On October 1,...Ch. 10 - Allocating payments and receipts to fixed asset...Ch. 10 - Comparing three depreciation methods Montes Coffee...Ch. 10 - Depreciation by three methods; partial years...Ch. 10 - Prob. 10.4APRCh. 10 - Transactions for fixed assets, including sale The...Ch. 10 - Amortization and depletion entries Data related to...Ch. 10 - Allocating payments and receipts to fixed asset...Ch. 10 - Comparing three depreciation methods Waylander...Ch. 10 - Depreciation by three methods; partial years...Ch. 10 - Depreciation by two methods; sale of fixed asset...Ch. 10 - Transactions for fixed assets, including sale The...Ch. 10 - Amortization and depletion entries Data related to...Ch. 10 - Prob. 10.1CPCh. 10 - Prob. 10.2CPCh. 10 - Effect of depreciation on net income Tuttle...Ch. 10 - Fixed asset turnover: three industries The...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Dungan Corporation is evaluating a proposal to purchase a new drill press to replace a less efficient machine presently in use. The cost of the new equipment at time 0, including delivery and Installation, is $205,000. If It is purchased, Dungan will incur costs of $5,200 to remove the present equipment and revamp its facilities. This $5,200 is tax deductible at time 0. Depreciation for tax purposes will be allowed as follows: year 1, $42,000; year 2, $72,000; and in each of years 3 through 5, $32,000 per year. The existing equipment has a book and tax value of $102,000 and a remaining useful life of 10 years. However, the existing equipment can be sold for only $42,000 and is being depreciated for book and tax purposes using the straight-line method over its actual life. Management has provided you with the following comparative manufacturing cost data. Annual capacity (units) Annual costs: Labor a. b. Depreciation Other (all cash) Total annual costs The existing equipment is expected…arrow_forwardThe term tax shield refers to the amount of income tax saved by deducting depreciation for income tax purposes. Assume that Supreme Company is considering the purchase of an asset as of January 1, 2017. The cost of the asset with a five-year life and zero residual value is $100,000. The company will use the straight-line method of depreciation. Supreme's income for tax purposes before recording depreciation on the asset will be $50,000 per year for the next five years. The corporation is currently in the 35% tax bracket. Required: Calculate the amount of income tax that Supreme must pay each year if the asset is and is not purchased. 1. Amount of taxes paid if asset is not purchased is: $fill in the blank 1 2a. Amount of depreciation if asset is purchased is: $fill in the blank 2 b. Amount of taxes paid if asset is purchased is: $fill in the blank 3 3. What is the amount of the depreciation tax shield? $fill in the blank 4arrow_forwardOn January 1, 2016, Margo Company acquired machinery at a cost of $160,000. This machinery was being depreciated by the double-declining-balance method over an estimated life of five years with no salvage value. At the beginning of 2018, Margo changed to and could justify straight-line depreciation. Margo's tax rate is 30 percent. What is the amount of depreciation expense to be included in 2018 net income?arrow_forward
- The Dauten Toy Corporation currently uses an injection molding machine that was purchased prior to the new tax legislation. The machine is being depreciated on a straight- line basis, and it has 6 years of remaining life. Its current book value is $2,400, and it can be sold for $2,600 at this time. Thus, the anual depreciation expense is $2,400/6= $400 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten offered a replacement machine which has a cost of $10,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would arise by $1,000 per year; even so, the new machine's much greater efficiency would cause operating expenses simultaneously increase by $500. Dauten's marginal federal-plus- state tax rate is 25%, and its WACC is 11% What is the NPV of the…arrow_forwardTotem group is planning to purchase a new printing machine to replace a current machine. The cost of the new machine Konica Minolta 512i , including delivery and installation, is IDR 140,000,000. If it is purchased, Totem will incur costs of IDR 10,000,000 to remove the current printing machine and revamp its facilities and it is tax deductible at time 0. Depreciation for tax purposes will be as follows: year 1, IDR 28,000,000; year 2, IDR 49,000,000; and in each of years 3 through 5, IDR 21,000,000 per year. The existing printing machine has a book value of IDR 70,000 and a remaining useful life of 5 years. However, the existing equipment can be sold for only IDR 25,000,000 and is being depreciated using the straight-line method over its actual life. Marketing team has provided comparative printing cost data as follow: Current Machine New Machine Machine Available per…arrow_forwardOn August 1, 2015, Toy Inc. purchased a new piece of equipment that cost $25000. The estimated useful life is five years and the estimated residual value is $2,500. During the five years of useful life the equipment is expected to produce 10,000 units. If Toy Inc. uses the straight line method of depreciation and sells the equipment for $11,500 on August 1st, 2018. What will be the realized gain (loss)? Multiple Choice $0 $4,500 $13,500 None of the other alternatives are correct ($9,000) Xarrow_forward
- The Dauten Toy Corporation currently uses an injection molding machine that was purchased prior to the new tax legislation. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,400, and it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,400/6 = $400 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of $10,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would rise by $800 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would…arrow_forwardThe Dauten Toy Corporation currently uses an injection molding machine that was purchased prior to the new tax legislation. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,400, and it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,400/6 = $400 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of $8,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would rise by $800 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by $1,000 per year. The new machine would require that inventories be increased by $2,500, but accounts payable would…arrow_forwardThe Dauten Toy Corporation currently uses an injection molding machine that was purchased prior to the new tax legislation. This machine is being depreciated on a straight-line basis, and it has 6 years of remaining life. Its current book value is $2,100, and it can be sold for $2,500 at this time. Thus, the annual depreciation expense is $2,100/6 = $350 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten is offered a replacement machine which has a cost of $9,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would rise by $800 per year; even so, the new machine's much greater efficiency would cause operating expenses to decline by $1,500 per year. The new machine would require that inventories be increased by $2,000, but accounts payable would…arrow_forward
- Popeye Company purchased a machine for $340,000 on January 1, 2020. Popeye depreciates machines of this type by the straight-line method over a five-year period using no salvage value. Due to an error, no depreciation was taken on this machine in 2020. Popeye discovered the error in 2021. What amount should Popeye record as depreciation expense for 2021? The tax rate is 25%. Multiple Choice $102,000. $136,000. $51,000. $68,000.arrow_forwardPopeye Company purchased a machine for $350,000 on January 1, 2020. Popeye depreciates machines of this type by the straight-line method over a five-year period using no salvage value. Due to an error, no depreciation was taken on this machine in 2020. Popeye discovered the error in 2021. What amount should Popeye record as depreciation expense for 2021? The tax rate is 25%. O O O O $105,000. $52,500. $70,000. $140,000.arrow_forwardIrwin, Inc. constructed a machine at a total cost of $35 million. Construction was completed at the end of 2017 and the machine was placed in service at the beginning of 2018. The machine was being depreciated over a 10-year life using the sum-of-the-years’-digits method. The residual value is expected to be $2 million. At the beginning of 2021, Irwin decided to change to the straight-line method. Ignoring income taxes, what journal entry(s) should Irwin record relating to the machine for 2021?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Financial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage Learning
Financial Accounting
Accounting
ISBN:9781305088436
Author:Carl Warren, Jim Reeve, Jonathan Duchac
Publisher:Cengage Learning
Chapter 19 Accounting for Income Taxes Part 1; Author: Vicki Stewart;https://www.youtube.com/watch?v=FMjwcdZhLoE;License: Standard Youtube License