Don Burnette is starting a new home planning business. For years, people have as

Question

Don Burnette is starting a new home planning business. For years, people have asked Don to draw up the blueprints for their homes and he has done so in his spare time. Don has decided to go into business full time and believes that he will need to add one new draftsman each year for the next five years as his business grows. Don believes that the best way to design homes is by using home designing software on a computer. Thus, he plans to buy himself a new computer and a computer for each new associate who joins the company. Don has heard that using MACRS for tax purposes will save him taxes and has asked you to develop a schedule illustrating the depreciation expense that would be recognized using straight-line depreciation for his income statement and MACRS depreciation for his tax return over the next eight years under the following assumptions: 1. Don will start his business on July 1, 20-1, and will purchase a new computer on that date. 2. Don will hire four new associates, one on July 1 of each year for the next four years, 20-2 through 20-5. He will also buy each associate a computer. 3. The computers cost $4,000, have useful lives of five years, and have no salvage value. Don will take a half-year's depreciation in the first and last year of each computer's life when computing straight-line depreciation. He will use the MACRS rates, which also assume a half-year's depreciation in the first and last years of the asset's life. 4. As each computer completes its five-year life, Don will buy a new one to replace it. 5. Don's tax rate is 30%.

Explanation / Answer

I have answered first 4 question as per Chegg Policy Answer 1 Straight line depreciation i Cost of computer 4000 ii usefull life 5 iii=i/ii Annual depreciation 800 iv First and last year half year depreciation 400 Computer equipment 20-1 20-2 20-3 20-4 20-5 20-6 20-7 20-8 Computer -1 400 800 800 800 800 400 Computer -2 400 800 800 800 800 400 Computer -3 400 800 800 800 800 400 Computer -4 400 800 800 800 800 Computer -5 400 800 800 800 Computer -6 400 800 800 Computer -7 400 800 Computer -8 400 Total 400 1200 2000 2800 3600 4000 4000 4000 Answer 2 MARCS depreciation year-1 year-2 year-3 year-4 year-5 year-6 Rate 20% 32% 19.20% 11.50% 11.50% 5.80% Depreciation =4000*rate           800        1,280           768           460           460           232        4,000 Computer equipment 20-1 20-2 20-3 20-4 20-5 20-6 20-7 20-8 Computer -1           800        1,280           768           460           460           232 Computer -2            800        1,280           768           460           460           232 Computer -3           800        1,280           768           460           460           232 Computer -4 800 1280 768 460 460 Computer -5 800 1280 768 460 Computer -6 800 1280 768 Computer -7 800 1280 Computer -8 800 Total 800 2080 2848 3308 3768 4000 4000 4000 Answer 3 Difference between straight line and MARCS depreciation rate Year 20-1 20-2 20-3 20-4 20-5 20-6 20-7 20-8 Difference 400 880 848 508 168 0 0 0 Answer 4 year 20-1 20-2 20-3 20-4 20-5 20-6 20-7 20-8 Tax saving 120 264 254 152 50 0 0 0 *difference as per answer *30% Commulative saving 120 384 638 791 841 841 841 841

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