AE9-11 -Depreciation Tax Shield [LO 4] Strauss Corporation is making a $70,000 i
ID: 2357417 • Letter: A
Question
AE9-11 -Depreciation Tax Shield [LO 4]Strauss Corporation is making a $70,000 investment in equipment with a 5-year life. The company uses the straight-line method of depreciation and has a tax rate of 40 percent. The company’s required rate of return is 11 percent.
What is the present value of the tax savings related to depreciation of the equipment?
(Round the present value factor calculations to 4 decimal places, e.g. 0.2525. Round all other calculations and the final answer to 2 decimal places, e.g. 25.21.)
Cash Flow Implications of Tax Losses [LO 4]
WesternGear.com is expected to have operating losses of $200,000 in its first year of business and $250,000 in its second year. However, the company expects to have income before taxes of $250,000 in its third year and $375,000 in its fourth year. The company’s required rate of return is 14 percent.
Assume a tax rate of 40 percent and that current losses can be used to offset taxable income in future years. What is the present value of tax savings related to the operating losses in years 1 and 2? (Round present value factor calculations to 4 decimal places, e.g. 0.2525. Round all other calculations and final answer to 0 decimal places, e.g. 5,252.)
Present Value = $ ________
AE3-7
Cost per Equivalent Unit [LO 3]
The balance in beginning Work in Process at Bing Rubber Company for direct labor was $151,500. During the month of March, an additional $852,900 of direct labor was incurred, and 31,200 pounds of rubber were produced. At the end of March, 12,000 pounds of rubber were in process and the units were 50 percent complete. At the start of March, the company had 6,520 pounds of rubber that were 40 percent complete.
Calculate the cost per equivalent unit for labor assuming that labor is added uniformly throughout the production process.
= $ ______ per pound
Explanation / Answer
Equipment life = 5 years
Straight line method depreciation = [($70,000 - $0) / 5]
Straight line method depreciation = $14,000
Present value of tax savings related to the depreciation of equipment =
[$14,000 * 0.40 * 3.695]
Present value of tax savings related to the depreciation of equipment = $20,692
1st year Operating Loss = $200,000
2nd year Operating Loss = $250,000
3rd year Income before taxes = $250,000
4th year Income before taxes = $375,000
Required Rate of Return = 14%
Tax Rate = 40%
Present value of tax savings related to the 1st year Operating loss
= [$200,000 * 0.40 * 0.8772]
Present value of tax savings related to the Operating loss = $70,176
Present value of tax savings related to the 2nd year Operating loss
= [$250,000 * 0.40 * 0.7695]
Present value of tax savings related to the 2nd y ear Operating loss = $76,950
Beginning Work in Process at Bing Rubber Company for direct labor was = $151,500
Additional Direct Labor was incurred = $852,900
Rubber produced = 31,200 pounds
At the end of March, 12,000 pounds of rubber were in process and the units were 50% complete.
Beginning inventory = 6,250 pounds
Beginning balance
6,520
During the month
31,200
To be accounted
37,720
Transferred out
25,720
Ending balance
12,000
Actual account
37,720
Equivalent units = [25,720 + (12,000 * 0.50)]
Equivalent units (in pounds) = 31,720 pounds
Cost per equivalent unit = [($151,500 + $852,900) / 31,720]
Cost per equivalent unit = $31.66
Beginning balance
6,520
During the month
31,200
To be accounted
37,720
Transferred out
25,720
Ending balance
12,000
Actual account
37,720
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