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Effect of depreciation on net income Einstein Construction Co. specializes in building replicas of historic houses. Bree Andrus. president of Einstein Construction, is considering the purchase of various items of equipment on July 1. 20Y2. for $300,000. 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, Bee is considenng depreciating the equipment by the straight-line method. She discussed the matter with her CPA and learned that although the straight-line method could be elected, it was to her advantage to use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes. She asked for your advice as to which method to use for tax purposes. Compute depreciation for each of the years (20Y2. 20Y3. 20Y4. 20Y5. 20Y6. and 20Y7) of useful life by (a) the straight-line method and (b) MACRS. In using the straight-line method, one-half years depreciation should be computed for 20Y2 and 20Y7. Use the MACRS rates presented in the chapter.

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
Publisher: Cengage Learning
ISBN: 9781305961883

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Chapter
Section
BuyFindarrow_forward

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
Publisher: Cengage Learning
ISBN: 9781305961883
Chapter 7, Problem 7.3.1C
Textbook Problem
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Effect of depreciation on net income

Einstein Construction Co. specializes in building replicas of historic houses. Bree Andrus. president of Einstein Construction, is considering the purchase of various items of equipment on July 1. 20Y2. for $300,000. 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, Bee is considenng depreciating the equipment by the straight-line method. She discussed the matter with her CPA and learned that although the straight-line method could be elected, it was to her advantage to use the Modified Accelerated Cost Recovery System (MACRS) for tax purposes. She asked for your advice as to which method to use for tax purposes.
Compute depreciation for each of the years (20Y2. 20Y3. 20Y4. 20Y5. 20Y6. and 20Y7) of useful life by (a) the straight-line method and (b) MACRS. In using the straight-line method, one-half years depreciation should be computed for 20Y2 and 20Y7. Use the MACRS rates presented in the chapter.

To determine

Concept Introduction:

Straight line method of depreciation:

This is one of the methods to calculate the depreciation on assets. Under this method the depreciable value of asset it divided equally for each year f its estimated life. The formula to calculate the deprecation under straight line method is as follows:

  Annual Straight line depreciation = (Cost Salvage Value)Estimated life in years 

Requirement-1:

To Calculate:

The depreciation for each year using the Straight Line Method

Explanation of Solution

The depreciation for each year using the Straight Line Method is calculated as follows:

    Year Depreciation Explanations
    20Y2 $ 30,000 (300000/5)*6/12
    20Y3 $ 60,000
To determine

Concept Introduction:

Straight line method of depreciation:

This is one of the methods to calculate the depreciation on assets. Under this method the depreciable value of asset it divided equally for each year f its estimated life. The formula to calculate the deprecation under straight line method is as follows:

  Annual Straight line depreciation = (Cost Salvage Value)Estimated life in years 

Requirement-1:

To Calculate:

The depreciation for each year using the MCRS Method

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Chapter 7 Solutions

Survey of Accounting (Accounting I)
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