Don urnette is stat ng a new home plenring business ror years peo e have asked D

Question

Don urnette is stat ng a new home plenring business ror years peo e have asked Don to draw up the blueprints for ne r homes ard he has done so in his spare tme. Don has decided to go into business ull time and be eves that he wil need to dd one new are sman each year or th?next five years as his business grows. Don believes that the best ay o design hon es s by usng ho e desgn ng software on a computer. Thus, he plans to buy himsef a new co puter and a co ter for each new assoc ate who ons the com any Don has heard that using MACRS for tax purpases will save him taxes and has asked you to develop a schedule illustrating the depreoiation expense that would be recognized using straight-line depreoation for his income statement and MACRS depreciation for his tax retum over the next eight years under the following sssumptions: L. Don will start his business on July 1, 20-1, and will purchase a new computer on that date. 2. Don wil 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 computer. 3. The computers cost $4,000, have useful lives of five ycars, and have no salvage valu. Don will take a half year's depreciation in the first and last ycar of each computer's life whon computing straight-linc 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. S. Don's tax rate is 30% Required 1. Prepare a depreciation schedule showing the straight-line depreciation expense for years 20-1 through 20-8. Straight-Line Depreciation Year Computer Equipment Computer 1 Computer 2 Computer 3 Computer 4 Computer 5 Computer 6 Computer computer 20-1 20-2 20-3 20-4 20-5 20-6 20-7 20-8

Explanation / Answer

Therefore it is advisable to follow MACR Depreciation Method which results in $841 Tax Savings and loose $841 tax savings if Follows Straight line method

Calculation of Depreciation($) under Straight Line Basis: Equipment 2001 2002 2003 2004 2005 2006 2007 2008 Computer 1 400 800 800 800 800 400 Computer 2 400 800 800 800 800 400 Computer 3 400 800 800 800 800 400 Computer 4 400 800 800 800 800 Computer 5 400 800 800 800 Computer 6 400 800 800 Computer 7 400 800 Computer 8 400 Total($) 400 1200 2000 2800 3600 4000 4000 4000

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