Textbook Problem

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.