The initial installed cost for a new piece of equipment is $10,000. After the eq
ID: 2773799 • Letter: T
Question
The initial installed cost for a new piece of equipment is $10,000. After the equipment has been in use for 4 years, it is sold for $7,000. The company that originally owned the equipment employs a straight-line method for determining depreciation costs. If the company had used the MACRS 5-year method for determining depreciation costs, the asset or book value for the piece of equipment at the end of 4 years would have been $1728. The total income tax rate for the company is 35% of all gross earnings. Capital gains taxes amount to 20% of the gain. How much net savings would the company have achieved by using the MACRS method instead of straight-line depreciation method?
Explanation / Answer
Answer: $ 191.2 is net savings would the company have achieved by using the MACRS method instead of straight-line depreciation method
Working notes
We have been provided with the following information
piece of equipment is $10,000.
equipment has been in use for 4 years, it is sold for $7,000.
If the company had used the MACRS 5-year method ,book value forof equipment at the end of 4 years would have been $1728
income tax rate for the company is 35%
Capital gains taxes amount to 20%
Generally MACRS is a depreciation method that is used only for income tax purposes. MACRS follows the half-year convention.you only get one-half year of depreciation in the first year of ownership,regardless of when you purchased the asset during the year.
Depreiciation as per Macrs metod
We will calculate depriciation as per straight line method as follow
The assets is sold at $ 7000
The value of property @ macrs method is 1728 (1152+576)
The value of property @ straight line method is 3000 (2000+1000)
Capital Gain in Macrs Metod
sale price $ 7,000
Book Value $ 1728
Gain $ 5272
Tax @ 20% $ 1054
Capital Gain in Straight Line Metod
sale price $ 7,000
Book Value $ 3000
Gain $ 4000
Tax @ 20% $ 800
Deprciation Tax Shild in both Method
Under Macrs Method
Depriciation Tax Shield is $ 2895.2
Less Capital Gain Tax $ (1054)
Net Gain 1841.2
Under Straight Line Method
Depriciation Tax Shield is $ 2450
Less Capital Gain Tax $ (800)
Net Gain 1650
Net Saving from Macrs Method Over Straight Line Method
Under Macrs Method $ 1841.2
Less : Under Straight Line $ (1650)
$ 191.2
Year Equipment Rate Amt of Depriciation 1 1000 20 2000 2 1000 32 3200 3 1000 19.2 1920 4 1000 11.52 1152 5 1000 11.52 1152 6 1000 5.76 576Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.