MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pretax income of $ 436,000 this year. The company's financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of $82,200and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule .Corporate tax rates are given a. If the firm purchases the grinders before year-end, what depreciation expense will it be able to claim this year?b. If the firm reduces its reported income by the amount of the depreciation expense calculated in parta,what tax savings will result? a. The depreciation expense they will be able to claim this year is _____$enter your response here.(Round to the nearest dollar.) Rounded Depreciation Percentages by Recovery Year Using MACRS forFirst Four Property ClassesRecovery year1234563 years33%45%15%7%7891011TotalsPercentage by recovery year*5 years20%32%19%12%12%5%7 years14%25%18%12%9%9%9%4%10 years10%18%14%12%9%8%7%6%6%6%4%100%100%100%100%*These percentages have been rounded to the nearest whole percent to simplify calculations whileretaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actualunrounded percentages or directly apply double-declining balance (200%) depreciation using the half-yearconvention. Corporate Tax Rate ScheduleRange of taxable income$0 to50,000 to75,000 to100,000 to335,000 to10,000,000 to15,000,000 toOver 18,333,333$50,00075,000100,000335,00010,000,00015,000,00018,333,333Base tax+Tax calculation(Marginal rate x Amount over base bracket)x amount overx amount overx amount overx amount overx amount overx amount overx amount overx amount over$0+ (15%+ (25%7,50013,750 +(34%(39%22,250 +113,900 + (34%(35%+ (38%+ (35%3,400,000 +5,150,0006,416,667$0)50,000)75,000)100,000)335,000)10,000,000)15,000,000)18,333,333)

Depreciation expenses under MACRS are crucial for businesses because they reduce taxable income,…

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pretax income of $ 436,000 this year. The company's financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of $82,200
and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule

Corporate tax rates are given

a. If the firm purchases the grinders before year-end, what depreciation expense will it be able to claim this year?

b. If the firm reduces its reported income by the amount of the depreciation expense calculated in part

what tax savings will result?

a. The depreciation expense they will be able to claim this year is _____$enter your response here.(Round to the nearest dollar.)

Rounded Depreciation Percentages by Recovery Year Using MACRS for
First Four Property Classes
Recovery year
1
2
3
4
5
6
3 years
33%
45%
15%
7%
7
8
9
10
11
Totals
Percentage by recovery year*
5 years
20%
32%
19%
12%
12%
5%
7 years
14%
25%
18%
12%
9%
9%
9%
4%
10 years
10%
18%
14%
12%
9%
8%
7%
6%
6%
6%
4%
100%
100%
100%
100%
*These percentages have been rounded to the nearest whole percent to simplify calculations while
retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual
unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year
convention.

Corporate Tax Rate Schedule
Range of taxable income
$0 to
50,000 to
75,000 to
100,000 to
335,000 to
10,000,000 to
15,000,000 to
Over 18,333,333
$50,000
75,000
100,000
335,000
10,000,000
15,000,000
18,333,333
Base tax
+
Tax calculation
(Marginal rate x Amount over base bracket)
x amount over
x amount over
x amount over
x amount over
x amount over
x amount over
x amount over
x amount over
$0
+ (15%
+ (25%
7,500
13,750 +
(34%
(39%
22,250 +
113,900 + (34%
(35%
+ (38%
+ (35%
3,400,000 +
5,150,000
6,416,667
$0)
50,000)
75,000)
100,000)
335,000)
10,000,000)
15,000,000)
18,333,333)

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