Don Burnette is starting a new home planning business. For years, people have asked Don to draw up the blueprints for their homes and he has done so in his spare time. Don has decided to go into business full time and believes that he will need to add one new draftsman each year for the next five years as his business grows. Don believes that the best way to design homes is by using home designing software on a computer. Thus, he plans to buy himself a new computer and a computer for each new associate who joins the company. Don has heard that using MACRS for tax purposes will save him taxes and has asked you to develop a schedule illustrating the depreciation expense that would be recognized using straight-line depreciation for his income statement and MACRS depreciation for his tax return over the next eight years under the following assumptions: 1. Don will start his business on July 1, 20-1, and will purchase a new computer on that date. 2. Don will hire four new associates, one on July 1 of each year for the next four years, 20-2 through 20-5. He will also buy each associate a computer. 3. The computers cost $4,000, have useful lives of five years, and have no salvage value. Don will take a half-year’s depreciation in the first and last year of each computer’s life when computing straight-line depreciation. He will use the MACRS rates, which also assume a half-year’s depreciation in the first and last years of the asset’s life. 4. As each computer completes its five-year life, Don will buy a new one to replace it. 5. Don’s tax rate is 30%. REQUIRED 1. Prepare a depreciation schedule showing the straight-line depreciation expense for years 20-1 through 20-8. 2. Prepare a depreciation schedule showing the MACRS depreciation for years 20-1 through 20-8. Use the MACRS rates shown below. 3. Compute the difference between straight-line depreciation and MACRS depreciation for each year, 20-1 through 20-8. 4. The differences in part (3) represent the differences in Don’s taxable income each year. By using MACRS, how much does Don save in taxes each year, and in total? 5. Under what conditions would Don lose the accumulated tax savings?

BuyFind

College Accounting, Chapters 1-27 ...

22nd Edition
James A. Heintz + 1 other
Publisher: Cengage Learning
ISBN: 9781305666160
BuyFind

College Accounting, Chapters 1-27 ...

22nd Edition
James A. Heintz + 1 other
Publisher: Cengage Learning
ISBN: 9781305666160

Solutions

Chapter
Section
Chapter 18, Problem 1CP
Textbook Problem

Don Burnette is starting a new home planning business. For years, people have asked Don to draw up the blueprints for their homes and he has done so in his spare time. Don has decided to go into business full time and believes that he will need to add one new draftsman each year for the next five years as his business grows. Don believes that the best way to design homes is by using home designing software on a computer. Thus, he plans to buy himself a new computer and a computer for each new associate who joins the company.

Don has heard that using MACRS for tax purposes will save him taxes and has asked you to develop a schedule illustrating the depreciation expense that would be recognized using straight-line depreciation for his income statement and

MACRS depreciation for his tax return over the next eight years under the following assumptions:

  1. 1. Don will start his business on July 1, 20-1, and will purchase a new computer on that date.
  2. 2. Don will hire four new associates, one on July 1 of each year for the next four years, 20-2 through 20-5. He will also buy each associate a computer.
  3. 3. The computers cost $4,000, have useful lives of five years, and have no salvage value. Don will take a half-year’s depreciation in the first and last year of each computer’s life when computing straight-line depreciation. He will use the MACRS rates, which also assume a half-year’s depreciation in the first and last years of the asset’s life.
  4. 4. As each computer completes its five-year life, Don will buy a new one to replace it.
  5. 5. Don’s tax rate is 30%.

REQUIRED

  1. 1. Prepare a depreciation schedule showing the straight-line depreciation expense for years 20-1 through 20-8.
  2. 2. Prepare a depreciation schedule showing the MACRS depreciation for years 20-1 through 20-8. Use the MACRS rates shown below.

Chapter 18, Problem 1CP, Don Burnette is starting a new home planning business. For years, people have asked Don to draw up

  1. 3. Compute the difference between straight-line depreciation and MACRS depreciation for each year, 20-1 through 20-8.
  2. 4. The differences in part (3) represent the differences in Don’s taxable income each year. By using MACRS, how much does Don save in taxes each year, and in total?
  3. 5. Under what conditions would Don lose the accumulated tax savings?

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Chapter 18 Solutions

College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)
Ch. 18 - The following costs were incurred to purchase a...Ch. 18 - The following information is provided for a...Ch. 18 - LO3 A machine costing 350,000 has a salvage value...Ch. 18 - Grandorf Company replaced the engine in a truck...Ch. 18 - Prepare journal entries for the following...Ch. 18 - Popilarz Mining acquired a coal mine at a cost of...Ch. 18 - Todd Company purchased a patent with a remaining...Ch. 18 - What costs should be included when measuring the...Ch. 18 - How should the cost of such activities as planting...Ch. 18 - What are the two major types of depreciation?Ch. 18 - What is meant by the depreciable cost of a plant...Ch. 18 - What are the four most commonly used methods of...Ch. 18 - Which depreciation method provides the fastest...Ch. 18 - Explain how the depreciation method selected...Ch. 18 - For assets acquired after 1986, what depreciation...Ch. 18 - How should additions or improvements representing...Ch. 18 - Explain what is meant by the replacement of a...Ch. 18 - What are the three major ways of disposing of a...Ch. 18 - For what time interval should depreciation expense...Ch. 18 - When a plant asset is sold, what must be known...Ch. 18 - What details about a particular asset are provided...Ch. 18 - What is the purpose of depletion?Ch. 18 - Which depreciation method is similar to the method...Ch. 18 - Over what period of time should the cost of a...Ch. 18 - How should the unamortized portion of the cost of...Ch. 18 - What is a trademark?Ch. 18 - What is a franchise? Name a franchise you have...Ch. 18 - What is goodwill? When is it recognized?Ch. 18 - What is impairment?Ch. 18 - COST OF PROPERTY, PLANT, AND EQUIPMENT Consider...Ch. 18 - STRAIGHT-LINE, DECLINING-BALANCE, AND...Ch. 18 - UNITS-OF-PRODUCTION METHOD The truck purchased in...Ch. 18 - JOURNAL ENTRIES: REPAIRS, MAINTENANCE, ADDITIONS,...Ch. 18 - JOURNAL ENTRIES: DISPOSITION OF PLANT ASSETS...Ch. 18 - DEPLETION Prepare the following entries using a...Ch. 18 - STRAIGHT-LINE, DECLINING-BALANCE,...Ch. 18 - UNITS-OF-PRODUCTION METHOD A machine is purchased...Ch. 18 - CALCULATING AND JOURNALIZING DEPRECIATION...Ch. 18 - IMPACT OF IMPROVEMENTS AND REPLACEMENTS ON THE...Ch. 18 - DISPOSITION OF ASSETS: JOURNALIZING Mitchell Parts...Ch. 18 - DEPLETION: CALCULATING AND JOURNALIZING Mineral...Ch. 18 - INTANGIBLE LONG-TERM ASSETS Track Town Co. had the...Ch. 18 - COST OF PROPERTY, PLANT, AND EQUIPMENT Lam Company...Ch. 18 - STRAIGHT-LINE, DECLINING-BALANCE, AND...Ch. 18 - UNITS-OF-PRODUCTION METHOD The truck purchased in...Ch. 18 - JOURNAL ENTRIES: REPAIRS, MAINTENANCE, ADDITIONS,...Ch. 18 - JOURNAL ENTRIES: DISPOSITION OF PLANT ASSETS...Ch. 18 - DEPLETION Prepare the following entries using a...Ch. 18 - STRAIGHT-LINE, DECLINING-BALANCE,...Ch. 18 - UNITS-OF-PRODUCTION METHOD A machine is purchased...Ch. 18 - CALCULATING AND JOURNALIZING DEPRECIATION...Ch. 18 - IMPACT OF IMPROVEMENTS AND REPLACEMENTS ON THE...Ch. 18 - DISPOSITION OF ASSETS: JOURNALIZING Mayer Delivery...Ch. 18 - DEPLETION: CALCULATING AND JOURNALIZING Mining...Ch. 18 - INTANGIBLE LONG-TERM ASSETS B. J. Bakery had the...Ch. 18 - A friend owns and operates her own business and is...Ch. 18 - Creative Solutions purchased a patent from Russell...Ch. 18 - On April 1, 20-3, Kwik Kopy Printing purchased a...Ch. 18 - Don Burnette is starting a new home planning...

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