E. Depreciation A machine was purchased on July 1, 2010 for $65,000. It has a 5
ID: 2449104 • Letter: E
Question
E. Depreciation A machine was purchased on July 1, 2010 for $65,000. It has a 5 year life and a $5,000 salvage value for financial reporting purposes. Straight line depreciation will be used for financial reporting purposes. DDBx with a zero salvage value will be used for tax purposes. Depreciation is taken to the nearest month. The company has a 2011 projected income of $100,000 before depreciation is deducted. The tax rate is 40%. 1. Calculate 2011 depreciation under both methods. 2. Make the entry to record taxes for 2011
Explanation / Answer
COST OF MACHINE=$65,000
USEFULL LIFE=5 YEARS
CALCULATION OF 2011 DEPRECIATION FOR FINANCIAL REPORTING PURPOSE:
SALVAGE VALUE FOR FINANCIAL REPORTING PURPOSE=$5,000
METHOD USED=STRAIGHT LINE
DEPRECIATION FOR FINANCIAL REPORTING PURPOSE=(COST OF MACHINE-SALVAGE VALUE)/USEFULL LIFE=($65,000-$5,000)/5
=$60,000/5
=$12,000 EACH YEAR FOR 5 YEARS
CALCULATION OF 2011 DEPRECIATION FOR TAX PURPOSE:
SALVAGE VALUE=0
METHOD USED=DDBx
DDB RATE =1/LIFE * 2=1/5 * 2=40%
DDB DEPRECIATION=BEGNING OF PERIOD CARRYING VALUE*DDB RATE
CALCULATIONS
PROJECTED INCOME FOR 2011=$1,00,000
DEPRECIATION FOR TAX PURPOSE=$20,800
INCOME AFTER DEPRECIATION=$1,00,000-$20,800=$79,200
TAX RATE=40%
TAX AMOUNT=$79,200*40%=$31,680
JOURNAL ENTRY TO RECORD TAXES FOR 2011
YEAR DDB 2010 $65,000*20%(FOR HALF YEAR)=$13,000 2011 $52,000*40%=$20,800Related Questions
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