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AccountingIntermediate Accounting: Reporting And Analysis3rd Edition

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Chapter 11, Problem 20E
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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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(Appendix 11.1) Depreciation for Financial Statements and Income Tax Purposes Dinkle Company purchased equipment for $50,000. The equipment has an estimated residual value of $5,000 and an expected useful life of 10 years. Dinkle uses straight-line depreciation for its financial statements.

Required:

What is the difference between the company’s income before taxes reported on its financial statements and the taxable income reported on its tax return in each of the first 2 years of the asset’s life if the asset was purchased on January 2, 2019, and its MACRS life is 5 years?

To determine

Identify the income before taxes of Company D reported on its financial statements and the taxable income reported on its tax return in each of the first 2 year and comment on its difference.

Explanation

Double-declining-balance method: The depreciation method which assumes that the consumption of economic benefits of long-term asset is high in the early years but gradually declines towards the end of its useful life is referred to as double-declining-balance method.

Modified accelerated cost recovery system (MACRS): This is a depreciation method permitted by Internal Revenue Service to be used for tax purposes because this method allows to record higher depreciation expense for certain years.

Calculate the financial statement depreciation:

Depreciation expenses=Acquisition cost – Residual valueUseful life =$50,000−$5,00010 years=$4,500 per year

Calculate the depreciation for income taxes under MACRS (double-declining):

2019:

MACRS depreciationexpenses for Year 1}=Cost of equipment×MACRS %=$50,000×0

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