Principles of Financial Accounting.
Principles of Financial Accounting.
22nd Edition
ISBN: 9780077632892
Author: John J. Wild
Publisher: McGraw Hill
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Chapter 25, Problem 3BP

1.

To determine

Prepare a five-column table with the below that reports amount using the straight-line depreciation method for each of the six years:

  1. a. Pretax income before depreciation,
  2. b. Straight-line depreciation expense,
  3. c. Taxable income,
  4. d. Income taxes, and
  5. e. Net cash flow.

1.

Expert Solution
Check Mark

Explanation of Solution

Cash flow:

Cash flow is the monetary consideration (return or income) received by the business for its long-term capital investment.

Straight-line depreciation method:

The depreciation method which assumes that the consumption of economic benefits of long-term asset could be distributed equally throughout the useful life of the asset, is referred to as straight-line method.

Prepare a five-column table that reports amounts using the straight-line depreciation for each of the six years as follows:

Years(a) (b)(c)(d) (e)
Income Before DepreciationStraight-Line  DepreciationTaxable Income Income Taxes @ 40%Net Cash Flows
  (ab)  (c×40%) (ad)
Year 1 $12,000$3,000$9,000$3,600$8,400
Year 2 12,0006,0006,0002,4009,600
Year 3 12,0006,0006,0002,4009,600
Year 4 12,0006,0006,0002,4009,600
Year 5 12,0006,0006,0002,4009,600
Year 6 $12,000$3,000$9,000$3,600$8,400

Table (1)

2.

To determine

Prepare a five-column table with the below that reports amount using the MACRS depreciation method for each of the six years:

  1. a. Pretax income before depreciation,
  2. b. MACRS depreciation expense,
  3. c. Taxable income,
  4. d. Income taxes, and
  5. e. Net cash flow.

2.

Expert Solution
Check Mark

Explanation of Solution

Cash flow:

Cash flow is the monetary consideration (return or income) received by the business for its long-term capital investment.

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.

Prepare a five-column table that reports amounts using MACRS depreciation method for each of the six years as follows:

Years(a) (b)(c)(d) (e)
Income Before DepreciationMACRS DepreciationTaxable Income Income Taxes @ 40%Net Cash Flows
  (ab)  (c×40%) (ad)
Year 1 12,000$6,000$  6,000$2,400$  9,600
Year 2 12,0009,6002,40096011,040
Year 3 12,0005,7606,2402,4969,504
Year 4 12,0003,4568,5443,4188,582
Year 5 12,0003,4568,5443,4188,582
Year 6 12,0001,72810,2724,1097,891

Table (2)

3.

To determine

Compute the net present value of the investment under straight-line depreciation method, using 10% discount rate.

3.

Expert Solution
Check Mark

Explanation of Solution

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Compute the net present value of the investment under straight-line depreciation method, using 10% discount rate as follows:

ParticularsCash flows Amount ($) (a)PV Factor @ 10 % (b)Present value (a×b)
Net cash inflows:   
      Year 1$  8,4000.9091$  7,636
      Year 29,6000.82647,933
      Year 39,6000.75137,212
      Year 49,6000.6836,557
      Year 59,6000.62095,961
      Year 6    8,4000.5645    4,742
Total$55,200  $40,041
Less: Amount invested  30,000
Net present value  $10,041

Table (3)

Note:

  • For the present value factors refer Table B.1 in appendix-B.

4.

To determine

Compute the net present value of the investment under MACRS depreciation method, using 10% discount rate.

4.

Expert Solution
Check Mark

Explanation of Solution

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

Compute the net present value of the investment under MACRS depreciation method, using 10% discount rate as follows:

ParticularsCash flows Amount ($) (a)PV Factor @ 10 % (b)Present value(a×b)
Net cash inflows:   
      Year 1$  9,6000.9091$  8,727
      Year 211,0400.82649,123
      Year 39,5040.75137,140
      Year 48,5820.68305,862
      Year 58,5820.62095,329
      Year 67,8910.56454,454
Total$55,199 40,635
Less: Amount invested  30,000
Net present value  $10,635

Table (4)

Note:

  • For the present value factors refer Table B.1 in appendix-B.

5.

To determine

Explain the reason for the increase in net present value under MACRS depreciation method.

5.

Expert Solution
Check Mark

Explanation of Solution

Explain the reason for the increase in net present value under MACRS depreciation method as follows:

From the above explanation it is clear that the net present value under MACRS depreciation method is higher than the net present value under straight-line depreciation method. This is due to the larger cash flows of the asset’s life in the earlier years. Hence, the depreciation deductions are also larger under MACRS depreciation method and thus this result in a less income tax payments in the earlier years.

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Chapter 25 Solutions

Principles of Financial Accounting.

Ch. 25 - Prob. 6DQCh. 25 - Prob. 7DQCh. 25 - Prob. 8DQCh. 25 - Prob. 9DQCh. 25 - Prob. 10DQCh. 25 - Prob. 11DQCh. 25 - Prob. 12DQCh. 25 - Prob. 13DQCh. 25 - Prob. 14DQCh. 25 - Prob. 15DQCh. 25 - Prob. 1QSCh. 25 - Prob. 2QSCh. 25 - Prob. 3QSCh. 25 - Prob. 4QSCh. 25 - Prob. 5QSCh. 25 - Prob. 6QSCh. 25 - Prob. 7QSCh. 25 - Prob. 8QSCh. 25 - Prob. 9QSCh. 25 - Prob. 10QSCh. 25 - Prob. 11QSCh. 25 - Prob. 12QSCh. 25 - Prob. 13QSCh. 25 - Prob. 14QSCh. 25 - Prob. 15QSCh. 25 - Prob. 16QSCh. 25 - Prob. 17QSCh. 25 - Prob. 18QSCh. 25 - Prob. 19QSCh. 25 - Prob. 20QSCh. 25 - Prob. 21QSCh. 25 - Prob. 22QSCh. 25 - Prob. 23QSCh. 25 - Prob. 24QSCh. 25 - Prob. 25QSCh. 25 - Prob. 26QSCh. 25 - Prob. 27QSCh. 25 - Prob. 1ECh. 25 - Prob. 2ECh. 25 - Prob. 3ECh. 25 - Prob. 4ECh. 25 - Prob. 5ECh. 25 - Prob. 6ECh. 25 - Prob. 7ECh. 25 - Prob. 8ECh. 25 - Prob. 9ECh. 25 - Prob. 10ECh. 25 - Prob. 11ECh. 25 - Prob. 12ECh. 25 - Prob. 13ECh. 25 - Prob. 14ECh. 25 - Prob. 15ECh. 25 - Prob. 16ECh. 25 - Prob. 17ECh. 25 - Prob. 18ECh. 25 - Prob. 19ECh. 25 - Prob. 20ECh. 25 - Prob. 21ECh. 25 - Prob. 22ECh. 25 - Prob. 23ECh. 25 - Exercise 25-24 Colt Company owns a machine that...Ch. 25 - Prob. 25ECh. 25 - Prob. 26ECh. 25 - Prob. 27ECh. 25 - Factor Company is planning to add a new product to...Ch. 25 - Prob. 2APCh. 25 - Prob. 3APCh. 25 - Prob. 4APCh. 25 - Prob. 5APCh. 25 - Prob. 6APCh. 25 - Cortino Company is planning to add a new product...Ch. 25 - Prob. 2BPCh. 25 - Prob. 3BPCh. 25 - Prob. 4BPCh. 25 - Prob. 5BPCh. 25 - Prob. 6BPCh. 25 - Prob. 25SPCh. 25 - Prob. 1BTNCh. 25 - Prob. 3BTNCh. 25 - Prob. 4BTNCh. 25 - BTN 25-7 Read the chapter opener about Limor Fried...Ch. 25 - Prob. 9BTN
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