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Tuttle Construction Co. specializes in building replicas of historic houses. Tim Newman, president of Tuttle Construction, is considering the purchase of various items of equipment on July 1, 2014, for $400,000. 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, Tim is considering depreciating the equipment, by the straight-line method. He discussed the matter with his CPA and learned that, although the straight-line method could be elected, it was to his advantage to use the Modified Accelerated Cost Recovery System (MACKS) for tax purposes, lie asked for your advice as to which method to use for tax purposes.
- 1. Compute depreciation for each of the years (2014, 2015, 2016, 2017, 2018, and 2019) of useful life by (a) the straight-line method and (b) MACRS. In using the straight-line method, one-half year's depreciation should be computed for 2014 and 2019.Use the MACRS rates presented in Exhibit 9.
- 2. Assuming that income before depreciation and income tax is estimated to be $750,000 uniformly per year and that the income tax rate is 40%, compute the net income for each of the years 2014, 2015, 2016, 2017, 2018, and 2019 if (a) the straight-line method is used and (b) MACRS is used.
- 3. What factors would you present for Tim's consideration in the selection of a depreciation method?
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- On January 1, 2016, Margo Company acquired machinery at a cost of $160,000. This machinery was being depreciated by the double-declining-balance method over an estimated life of five years with no salvage value. At the beginning of 2018, Margo changed to and could justify straight-line depreciation. Margo's tax rate is 30 percent. What is the amount of depreciation expense to be included in 2018 net income?arrow_forwardOn August 1, 2015, Toy Inc. purchased a new piece of equipment that cost $25000. The estimated useful life is five years and the estimated residual value is $2,500. During the five years of useful life the equipment is expected to produce 10,000 units. If Toy Inc. uses the straight line method of depreciation and sells the equipment for $11,500 on August 1st, 2018. What will be the realized gain (loss)? Multiple Choice $0 $4,500 $13,500 None of the other alternatives are correct ($9,000) Xarrow_forwardThe Dauten Toy Corporation currently uses an injection molding machine that was purchased prior to the new tax legislation. The machine is being depreciated on a straight- line basis, and it has 6 years of remaining life. Its current book value is $2,400, and it can be sold for $2,600 at this time. Thus, the anual depreciation expense is $2,400/6= $400 per year. If the old machine is not replaced, it can be sold for $500 at the end of its useful life. Dauten offered a replacement machine which has a cost of $10,000, an estimated useful life of 6 years, and an estimated salvage value of $800. The replacement machine is eligible for 100% bonus depreciation at the time of purchase. The replacement machine would permit an output expansion, so sales would arise by $1,000 per year; even so, the new machine's much greater efficiency would cause operating expenses simultaneously increase by $500. Dauten's marginal federal-plus- state tax rate is 25%, and its WACC is 11% What is the NPV of the…arrow_forward
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- Financial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage Learning