Equipment associated with manufacturing small railcars had a first cost of $170,

Question

Equipment associated with manufacturing small railcars had a first cost of $170,000 with an expected salvage value of $30,000 at the end of its 5-year life. The revenue was $632,000 in year 2, with operating expenses of $98,000. If the company’s effective tax rate was 29%, what would be the difference in taxes paid in year 2 if the depreciation method were straight line instead of Modified Accelerated Cost Recovery System (MACRS)? The MACRS depreciation rate for year 2 is 32%.

The difference in taxes paid is determined to be $

Explanation / Answer

Year 2 Revenue $        632,000 Less: Operating expenses              98,000 Less: Depreciation - SL              28,000 =(170000-30000)/5 Income before taxes            506,000 Taxes at 29% $        146,740 Year 2 Revenue $        632,000 Less: Operating expenses              98,000 Less: Depreciation - MACRS-32%              54,400 =170000*0.32 Income before taxes            479,600 Taxes at 29% $        139,084 Difference in taxes $            7,656 (146740-139084)

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