Tim Newman, president of Tuttle Construction, is considering the purchase of var

Question

Tim Newman, president of Tuttle Construction, is considering the purchase of various items of equip- ment on July 1, 2014, for $400,000. The equipment would have a useful life of five years and no residual value. 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 (MACRS) for tax purposes. He 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.

Explanation / Answer

Calculation of the depreciation 1) Straight Line method Depreciation per year = Cost- Salvage/ Life 400000/5 $ 80000 per year Year Depreciation 2014 40000 ( 80000/2 i.e. half year depreciation) 2015 80000 2016 80000 2017 80000 2018 80000 2019 40000 Year Net Income Depreciation Income after dep Tax@ 40% Net Income 2014 750000 40000 710000 284000 426000 2015 750000 80000 670000 268000 402000 2016 750000 80000 670000 268000 402000 2017 750000 80000 670000 268000 402000 2018 750000 80000 670000 268000 402000 2019 750000 40000 710000 284000 426000 MACR Year Depreciation Depreciation Income before dep After Dep Tax Net Income 2014 20% 80000 750000 670000 268000 402000 2015 32% 128000 750000 622000 248800 373200 2016 19.20% 76800 750000 673200 269280 403920 2017 11.52% 46080 750000 703920 281568 422352 2018 11.52% 46080 750000 703920 281568 422352 2019 5.76% 23040 750000 726960 290784 436176

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