Chapter 11: Q11-29Q (page 583)
What is a modified accelerated cost recovery system (MACRS)? Speculate as to why this system is now required for tax purposes.
Answer
MACRS was adopted to permit a faster write-off of tangible assets to provide additional tax incentives and simplify depreciation.
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If Remmers, Inc. uses the composite method and its composite rate is 7.5% per year, what entry should it make when plant assets that originally cost \(50,000 and have been used for 10 years are sold for \)14,000?
(Depreciation for Partial Periods—SL, Act., SYD, and DDB) On January 1, 2015, a machine was purchased for \(90,000. The machine has an estimated salvage value of \)6,000 and an estimated useful life of 5 years. The machine can operate for 100,000 hours before it needs to be replaced. The company closed its books on December 31 and operates the machine as follows: 2015, 20,000 hours; 2016, 25,000 hours; 2017, 15,000 hours; 2018, 30,000 hours; and 2019, 10,000 hours.
Instructions
(a) Compute the annual depreciation charges over the machine’s life assuming a December 31 year-end for each of the following depreciation methods.
(b) Assume a fiscal year-end of September 30. Compute the annual depreciation charges over the asset’s life applying each of the following methods.
On January 1, 2016, Locke Company, a small machine-tool manufacturer, acquired for \(1,260,000 a piece of new industrial equipment. The new equipment had a useful life of 5 years, and the salvage value was estimated to be \)60,000. Locke estimates that the new equipment can produce 12,000 machine tools in its first year. It estimates that production will decline by 1,000 units per year over the remaining useful life of the equipment.
The following depreciation methods may be used:
Use the MACRS tables for computing depreciation.
Instructions
Cominsky Company purchased a machine on July 1, 2018, for \(28,000. Cominsky paid \)200 in title fees and county property tax of \(125 on the machine. In addition, Cominsky paid \)500 shipping charges for delivery, and \(475 was paid to a local contractor to build and wire a platform for the machine on the plant floor. The machine has an estimated useful life of 6 years with a salvage value of \)3,000. Determine the depreciation base of Cominsky’s new machine. Cominsky uses straightline depreciation.
(Book vs. Tax (MACRS) Depreciation) Shimei Inc. purchased computer equipment on March 1, 2017, for \(31,000. The computer equipment has a useful life of 10 years and a salvage value of \)1,000. For tax purposes, the MACRS class life is 5 years.
Instructions
a. Assuming that the company uses the straight-line method for book and tax purposes, what is the depreciation expense reported in
b. Assuming that the company uses the double-declining-balance method for both book and tax purposes, what is the depreciation expense reported in
c. Why is depreciation for tax purposes different from depreciation for book purposes even if the company uses the same depreciation method to compute them both?
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