1- an asset was acquired by Hugo and Sons for a first cost of $100,000 via a 10%
ID: 1101843 • Letter: 1
Question
1- an asset was acquired by Hugo and Sons for a first cost of $100,000 via a 10% per year loan that needs to be paid back using equal uniform amounts at the end of each year in 2 years. The amount of principal paid for the second year on this loan is?
2- an asset was acquired by Hugo and Sons for a first cost of $100,000. For tax porposes they estimate the life of the asset as three years. If Hugo and Sons utilize MACRS deprecation, the amount of depreciation for this asset in yeat two is?
**Questions 3,4 and 5 look the same but you are asked for different thing at the very end**
3- Shockers Corp, acquires an asset for $200000 which they estimate 3 years as service life. At the end of year 2 the book value of the asset is $60000 and for year 2, there is a depreciation amount of $40000. Given that for year 2, grosss income is $120000, and expenses are $70000, the Before Tax Cash Flow amount in year two is?
4- Shockers Corp, acquires an asset for $200000 which they estimate 3 years as service life. At the end of year 2 the book value of the asset is $60000 and for year 2, there is a depreciation amount of $40000. Given that for year 2, grosss income is $120000, and expenses are $70000, and the asset is sold for $240000, the depreciation recapture amount is?
5- Shockers Corp, acquires an asset for $200000 which they estimate 3 years as service life. At the end of year 2 the book value of the asset is $60000 and for year 2, there is a depreciation amount of $40000. Given that for year 2, grosss income is $120000, and expenses are $70000, and the asset is sold for $240000, the taxable income is?
Explanation / Answer
1) Equal instalment be X. Hence X/(1+r) + X/(1+r2) = 100,000
Amount paid in year 1 and year 2 = X = $ 57619.05 which is closest to $ 57,620
Out of this $ 5238 goes towards interest and hence, $ 52,382 goes towards prncipal payment
2) As per MACRS 3 year table depreciaition in year 2 = 44.45%
44.45% * 100,000 = 44,450
=>Answer = $ 44,450
3) Cash flow amount is unaffected by depreciation. Hence before tax cash flow = gross income - op expenses = $ 120,000 - $ 70,000 = $ 50,000 = Answer
4) Depreciation recapture amount = Sell value - Book value = $ 240,000 - $ 60,000 = $ 180,000 = Answer
5) Taxable income = Gross Income - Operating expenses - Depreciation + depreciation recapture = 120,000 - 70,000 - 40,000 + 180,000 = $ 190,000 = answer
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