E11-25 Book vs. Tax (MACRS) Depreciation) futabatei enterprises purchased a deli

Question

E11-25 Book vs. Tax (MACRS) Depreciation) futabatei enterprises purchased a delivery truck on january 1, 2014, at a cost of $27,000. the truck has a useful life of 7 years with an estimated salvage value of $6,000. The straight-line method is used for book purchases, the truck, having an MACRS class life of 7 years, is classified as 5-year property, the optimal MACRS tax rate tables are used to compute depreciation. in addition, assume that for 2014 and 2015 the company has revenues of $200,000 and operating expenses (excluding depreciation) of $130,000. Instructions. A. Prepare income statements for 2014 and 2015. (The final amount reported on the income statement should be income before income taxes.) B. Compute taxable income for 2014 and 2015. C. Determine the total depreciation to be taken over the useful life of the delivery truck for both book and tax purposes. D. Explain why depreciation for book and tax purposes will generally be different over the useful life of a depreciation asset.

Explanation / Answer

Futabatei Enterprises Date Details Jan 1. 2014. Purchase value of Truck $         27,000 Residual value $           6,000 Depreciable value $         21,000 Useful life 7 years Book depreciation/year using SL method $     3,000.00 MACR 5 yrs depreciation rates 1 st year 20% 2 nd year 32% MACR basis value $         27,000 Tax depreciation 2014               5,400 Tax depreciation 2015               8,640 A Income statement All amt in $ Details Year 2014 Year 2015 a Revenue           200,000       200,000 b Less : Operating Expenses           130,000       130,000 c Less : Book depreciation               3,000            3,000 d Taxable Income For accounting puepose=a-b-c             67,000          67,000 e Considering Tax depreciation               5,400            8,640 B Taxable Income For Income Tax purpose=a-b-e             64,600          61,360 C Total depreciation for book purpose =Cost -salvage value = $     21,000 Total depreciation for Tax purpose =Cost $     27,000 D Total depreciation over useful life for book purpose and Tax purpoe varies because in book purpose salvage value is considered for depreciable value calculation , but for MACR Tax purpose only cost value considered for depreciation. Salvage value not taken into consideration for Tax purpose.

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