MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc.,
ID: 2813183 • Letter: M
Question
MACRS depreciation expense and accounting cash flow Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pretax income of $440,000 this year. The company's financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of s80.900 and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule Corporate tax rates are given 6 a. If the firm purchases the grinders before year-end, what depreciation expense will it be able to claim this year? b. If the firm reduces its reported income by the amount of the depreciation expense calculated in part a, what tax savings will result? a. The depreciation expense they will be able to claim this year is 16180. (Round to the nearest dollar.) b. The tax savings will be $(Round to the nearest dollar)Explanation / Answer
a)
The depreciation expenses they will be able to claim this year is = 0.20 x $ 80,900
The depreciation expenses they will be able to claim this year is = $ 16,180
_______________________________________________________________
b) Without depreication expense, taxes to be paid = $ 113,900 + 0.34 x ( $ 440,000 - $ 335,000)
Without depreication expense, taxes to be paid = $ 149,600
For 5 years, the taxes to be paid = $ 149,600 x 5
For 5 years, the taxes to be paid = $ 748,000
By claiming the depreciation expense, the total tax to be paid over a period of 5 years = $721,869.30
The tax savings will be = $ 748,000 - $721,869.30
The tax savings will be = $26,131
Year Reported income Depreciation rate Depreciation expenses Reported income after depreication Taxe to be paid 1 $440,000 20% 16180 $423,820 $144,098.80 2 $440,000 32% 25888 $414,112 $140,798.08 3 $440,000 19% 15371 $424,629 $144,373.86 4 $440,000 12% 9708 $430,292 $146,299.28 5 $440,000 12% 9708 $430,292 $146,299.28 6 $0 5% 0 0 $721,869.30Related Questions
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