1. On April 30, 2009, Tilton Products purchased machinery for $88,000. The usefu
ID: 2389586 • Letter: 1
Question
1. On April 30, 2009, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value. Refer to the information above. Assume that in its financial statements, Tilton Products uses straight-line depreciation and the half-year convention. Depreciation expense recognized on this machinery in 2009 and 2010 will be:A) $5,000 in 2009 and $10,000 in 2010.
B) $5,500 in 2009 and $11,000 in 2010
C) $6,000 in 2009 and $12,000 in 2010.
D) $7,500 in 2009 and $11,000 in 2010.
2. On April 30, 2009, Tilton Products purchased machinery for $88,000. The useful life of this machinery is estimated at 8 years, with an $8,000 residual value. Refer to the information above. Assume that in its financial statements, Tilton Products uses straight-line depreciation and the half-year convention.Refer to the information above. Assume that in its financial statements, Tilton Products uses straight-line depreciation and rounds depreciation for fractional years to the nearest month. Depreciation expense recognized on this machinery in 2009 and 2010 will be:
A) $5,833 in 2009 and $10,000 in 2010.
B) $6,667 in 2009 and $10,000 in 2010.
C) $10,000 in 2009 and $10,000 in 2010.
D) $2,333 in 2009 and $7,000 in 2010.
Explanation / Answer
Permanent Income Hypothesis in Context of the Two Period Model We can simulate Friedman's idea of Permanent (Planning) Income in the two period model. To mimic a positive shock to temporary income we can simply increase current income and we get the same results as earlier. The mimic a positive shock to permanent income we could increase income in both the current and future income. This generates a much larger shift in the bud- get constraint and thus permanent income eects are larger than transitory. Start thinking ahead about government nance. Suppose the government proposes a permanent versus temporary tax cut, how would consumers re- act? 8 1.1.8 An Increase in the Real Interest Rate What would happen to this situation is the rental rate, r, were to increase? Remember we can write the lifetime budget constraint as, c0 = (1 + r)we ?? (1 + r)c We see that with an increase in r, we raise the intercept and raise the slope of the budget set. An increase in the rental rate of capital will cause the budget constraint to become steeper. This graph assumes that the household only receives wages in the current period and no wages in the future period. The endowment point is on the horizontal axis. In general, changes to the in- terest rate lead to rotations in the budget constraint around the endowment point. Why?? This can lead to substantial changes in the optimal choices for the consumer. Regardless of the situation, an increase in the rental rate of capital makes a higher indierence curve attainable. There are other situ- ations that can cause the budget set to move, we will leave these homework problems. 1.2 Government Now that we have looked at the consumers let's complete the description of this economy by looking at the government. In this economy the will purchase good G in the current period and G0 in the future period. These purchases are partial funded by taxes today T and taxes tomorrow T0. Given there are N consumers we know that T = Nt and T0 = nt0. The government, just like the households, can borrow in the current period by issuing bonds. They borrow at the real interest rate r. If we let B be the quantity of government bonds. The current period government budget constraint is G = T + B the future period constraint is G0 + (1 + r)B = T0 Just like the households these period by period constraints can be formu- lated into a lifetime budget constraint by substituting B out of the future constraint into the current constraint. We nd B = (T0 ?? G0)=(1 + r) 9 and then by substituting we nd G + G0 1 + r = T + T0 1 + r One important point here is that the government must eventually pay o their debts. 1.3 Competitive Equilibrium We have now described the economy and can now describe the solution for the model by explaining the competitive equilibrium. The key market in this economy is the credit market which is where the government and the households interact. Both the consumers and the government can borrow and lend at the market interest rate. The competitive equilibrium in this two-period economy consists of three conditions. 1. Each consumer choose current and future consumption and savings optimally given market interest rate r 2. The government lifetime budget constrain holds. 3. The credit market is in equilibrium The equilibrium is in equilibrium when the quantity that the consumers want to lend in the current period is equal to what the government wants to borrow. That is equilibrium in the credit market is S = B This implies Y = C + G Why? Well think about national income account. From the household budget constraint we have S = Y ?? C ?? T from the government constraint we have B = G ?? T 10 Since equilibrium implies B = S, We can substitute to get Y ?? C ?? T = G ?? T or Y = C + G
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