Question

At December 31, 20X1, the tax return records of Garner Corporation reflected the following information: Revenue $100,000, Operating Expenses (excluding depreciation) $66,000, and Depreciation Expense (MACRS) $7,000. Garner's income tax rate is 30%. Garner is considering using the straight-line depreciation method for financial statement reporting, in which case depreciation expense would be $4,000. What would be the difference in pretax income between using the straight-line method versus an accelerated method of depreciation? (Hint: Set up a basic income statement for each depreciation method.)

$ 3,000

$ 2,100

$ 900

$ 0

At December 31, 20X1, the tax return records of Garner Corporation reflected the following information: Revenue $100,000, Operating Expenses (excluding depreciation) $66,000, and Depreciation Expense (MACRS) $7,000. Garner's income tax rate is 30%. Garner is considering using the straight-line depreciation method for financial statement reporting, in which case depreciation expense would be $4,000. Electing the accelerated depreciation method on the income tax return instead of adopting straight-line, would save how much cash in 20X1?

$ 3,000

$ 2,100

$ 900

$ 0

Answer 1

1. Option $3000 [ 30,000 - 27,000]

2. Option , $900 [ 9000 - 8100]

Workings:

As per accelerated method of depreciation:

Revenue	100,000
Less: Operating expenses	66,000
Depreciation as per accelerated method	7000
Profit before tax	27,000
Tax @30%	8100
Profit after tax	18,900

As per straight line :

Revenue	100,000
Less: Operating expenses	66,000
Depreciation as per straight line method	4000
Profit before tax	30,000
Tax @30%	9000
Profit after tax	21,000