Question

11-32 Loretta Livermore Labs purchased R&D equipment costing $200,000. The interest rate is 5%, salvage value is $20,000, and expected life is 10 years. Compute the PW of the depreciation deductions assuming: (a) Straight-line depreciation (6) Double declining balance depreciation (C) 100% bonus depreciation (d) MACRS depreciation (e) Which method is preferred for determining the firm's taxes? (f) Which method is preferred for determining the firm's value? (8) Is using two accounting methods ethical?

Answer 1

a)straight line method depreciation method:

Depreciation =cost of the asset-salvage value/life of the asset

depreciation=$200,000-$20,000/10=$18,000 per year

for 1st year=$18000: for 2nd year=$18000: for 3rd year=$18000

b)double declining balance method

DEP =$200,000-$20,000/10=$18,000 per year

rate of depreciation =depreciation/cost-salvage = 18000/180000=10%

1st year=180000*10%=18000

2nd year=180000-18000=162000*10%=16200

3rd year=162000-16200=145800*10%=14580

c) 100% bonus depreciation method

in this method claim 100% tax rate of amount as deduction

we assuming in this question 30% as tax rate

cost is $200,000*30%=$60,000 is depreciation

d) MACRS DEPRECIATION

BASED UPON THE MACRS TABLE WE CAN COMPUTE DEPRECIATION FOR THE ASSET

FIRST CLASSIFY THE ASSET WHICH CATEGORY OF LIFE IN THIS CASE ASSET HAS 10 YEARS OF LIFE

• When using MACRS, an asset does not have any salvage value

FOR 1st year=10% rate=200000*10%=20000

2nd year=18% rate=200000*18%=36000

3rd year =14.4% rate =200000*14.4%=28800

4th year=11.52 rate =200000*11.52%=23040

5th yea =9.22 rate =200000*9.22%=18440

6th year =7.37 rate =200000*7.22%=14440

7th year =6.55% rate =200000*6.55%=13100

8th year=6.55% rate =200000*6.55%=13100

9th year=6.56% rate =200000*6.56%=13120

10th year=6.55% rate =200000*6.55%=13100

e) double declining depreciation method is preferred

f)

g) two accounting method may not because as per standards only one method can use for the benefit of the users of financial statements using one method has advantages like for comparability by year wise, methods can change except in the events of requirements of law/changes in the standards/for effective presentation