Question

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On January 1, 2017. AmerEx Transportation Company purchased a used aircraft at a cost of 564,400,000. AmerEx expects the plane to remain useful for five years (7,000,000 miles) and to have a residual value of $6,400,000. AmerEx expects to fly the plane 775,000 miles the first year, 1,200,000 miles each year during the second third, and fourth years, and 2,625,000 miles the last year. (Click the icon to view the first year depreciation amounts under each method.) Read the requirements 1. Which depreciation method offers the highest tax advantage for the first year? Describe the nature of the tax advantage. The double declining-balance method offers the tax advantage for the first year of the asset's use. The advantage results from the greater amount of depreciation (versus the other methods) in the first year. This method also produces the fastest tax deductions and conserves cash that the taxpayer can invest to earn more income. 2. How much Income tax will AmerEx save for the first year of the airplane's use under the method you just selected as compared with using the straight-line depreciation method? The company's income tax rate is 32%. Ignore any eamings from investing the extra cash. (Round the depreciation rates to two decimal places. Round your final answers to the nearest whole dollar) i Requirements Compute the tax savings: Double-declining-balance depreciation Lesa: Straight-line depreciation Excess depreciation tax deduction Income tax rate Income tax savings for first year Assume AmerEx is trying to decide which depreciation method to use for income tax purposes. The company can choose from among the following methods: (a) straight-line. (b) unils-of-production, or (c) double-declining-balance methods. 1. Which depreciation method offers the highest tax advantage for the first year? Describe the nature of the tax advantage. 2. How much income tax will AmerEx save for the first year of the airplane's use under the method you just selected as compared with using the straight-line depreciation method? The company's income tax rate is 32%. Ignore any eamings from investing the extra cash. Choose from any list or enter any number in the input fields and then click Check Answer. All parts showing Clear All Print Done

Answer 1

Straight line Depreciation = (Original value - Salvage Value) / Useful Life
= ($64,400,000 - 6,400,000)/5 = $11,600,000

Double Declining Depreciation = Beginning Value x 2 times straight line rate
= $64,400,000 x 40% = $25,760,000

Double Declining balance Depreciation	$        25,760,000
Less : Straight line Depreciation	$        11,600,000
Excess Depreciation tax deduction	$        14,160,000
Income tax rate	32%
Income tax savings for first year	$          4,531,200