Question

TUTUUS dldlce SCL ACCOU e 5.1: Jefferson Imaging Clinic cept: Understanding depreciation and deferred taxes Key concept: Unda medical office computerized interpretation. The digital images along he Jefferson Imaging Clinic Inc., a for-profit entity that is taxed as a “C” corpora- tion, was started three years ago by James Jefferson, MD, to provide fast, low-cost imaging services for patients in a large metropolitan area. The clinic is located in a office park and provides both imaging-via fluoroscopy, projectional radiographs, terized tomography (CT), and magnetic resonance imaging (MRI) and image tation. The clinic has state-of-the-art computer capabilities and can transmit the images along with the image interpretation to local doctors when requested. The imaging equipment was all acquired during the first month of the clinic's ions at a total cost of $2,000,000. For financial reporting purposes, the equip or is being depreciated over five years using the straight-line method with no expected ce value. For tax purposes, the equipment is being depreciated using the Internal e Service's Modified Accelerated Cost Recovery System (MACRS) rates, which operations at a are as follows: Year Yearly Rate .200 320 .192 .115 .115 .058 Total 100.000 These MACRS rates are based on the double-declining balance depreciation method, five-year life, and they incorporate the half-year convention for the first year.

Answer 1

Ans.1	Depreciation as per Straight Line Method
	Year	Depreciation = 2,000,000/5
	1	400,000
	2	400,000
	3	400,000
	4	400,000
	5	400,000
Ans.2	Depreciation as per MACRS
	A.Year	B.Yearly rate	C.Cost	Depreciation = B*C
	1	0.2	2,000,000	400,000
	2	0.32	2,000,000	640,000
	3	0.192	2,000,000	384,000
	4	0.115	2,000,000	230,000
	5	0.115	2,000,000	230,000
	6	0.058	2,000,000	116,000
Ans.3	Yearly difference of depreciation between the above two methods
	Year	Dep. As per SLM	Dep. As per MACRS	Difference
	1	400,000	400,000	0
	2	400,000	640,000	240,000
	3	400,000	384,000	-16,000
	4	400,000	230,000	-170,000
	5	400,000	230,000	-170,000
	6		116,000	116,000
	Total	2,000,000	2,000,000	0
Ans.4	The net difference over total period of 6 years is zero.
Ans.5,6,7				Year 1	Year 2	Year 5
	Income before Depreciation			800,000	800,000	800,000
	Depreciation in year 1			400,000	400,000	400,000
	Profit before tax			400,000	400,000	400,000
	Tax (PBT*30%)			120,000	120,000	120,000
	Profit after tax (PBT-Tax)			280,000	280,000	280,000
	Journal Entry in all three cases :
	Income Tax Expense Dr.120,000
	Provision for Tax        Cr.120,000
	*Assuming we followed SLM basis of depreciation
Ans.8	Depreciation provides a tax shield to the company since depreciation is a tax-deductible expense. The Financial benefit in the form of tax shield for every year is computed below :
	Year	Dep. As per MACRS	Tax Shield =Dep*30%
	1	400,000	120,000
	2	640,000	192,000
	3	384,000	115,200
	4	230,000	69,000
	5	230,000	69,000
	6	116,000	34,800
			600,000
Ans.9	If the government allows 100% of equipment cost to be deducted in the year of purchase, the profit will be reduced to the extent of entire equipment cost and lower profit will result in lower taxes.