Equipment associated with manufacturing small railcars had a first cost of $210,

ID: 2568493 • Letter: E

Question

Equipment associated with manufacturing small railcars had a first cost of $210,000 with an expected salvage value of $30,000 at the end of its 5-year life. The revenue was $602,000 in year 2, with operating expenses of $98,000. If the company’s effective tax rate was 34%, 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

Depreciation per Annum= Original Value- Salvage Value/ Estimated life of Asset

=$210,000-$30,000/5

=$180,000/5

=$36,000

Depreciation for Year 2 under MACRS =Original Cost x Depreciation %
=$210,000 x 32%

=$67,200

Comparative Income Statement

Particulars

Straight line

MACRS

Difference

Revenue

$ 602,000

Less: Operating Expenses

$ (98,000)

EBITDA

$ 504,000

Less: Depreciation

$ (36,000)

$ (67,200)

Profit Before Tax

$ 468,000

$ 436,800

Less: Tax @ 34%

$ 159,120

$ 148,512

$ 10,608

The difference in taxes paid is determined to be $ 10,608