Chapter 16 Part 1 instructions help Question 1 (of 10.00 points In 2004, EDOUARD

Question

Chapter 16 Part 1 instructions help Question 1 (of 10.00 points In 2004, EDOUARD, S.A., the manufacturer of PLYLOX clips, purchases a new machine in anticipation of increased demand due to forecasted Hurricane activity in the Atlantie Ocean. The purchase price is $10 Million. EDOUARD uses straight-ine depreciation for financial reporting purposes, and estimates that the machine will last 10 years and will not have a residual value Income prior to depreclation and taxes ls $5 Million each year for the next 10 yeare. The Income tax rate is 40%. ntshe amta et ncme and come rax expense FrcAR) reot or the next 10 years? (You need to be able to calculate this, but do not have to provide your answer here) For tax purposes, EDOUARD uses the following schedule to depreclate the equipment: Years 1-2: $3 Million per year Years 3-10: $0.5 Million per year taxes EDOUARD pay each year? (You need ta he ahle to calculate is, but c not hae toprvide your answer here Rocd a fransactions relaicd otaxes over the 10 yoar pxi (You need to be able to answer the above questons, but oniy need to answer the specitc questons below) What is the amount of the income tex expense Edouard will reccgnize each yeer? What is the amount of cash paid for taxes in years 1 and 2? What is the amount of cash paid for taxes in years 3 10? In years 1 and 2, what amount is credited to DTL each year? In years 3-10, what armount is debited to DTL each year?

Explanation / Answer

Income tax expense recognised each year = 1.6 as per SPL(calculation are given above)

Cash paid for taxed in year 1 & 2 = 0.8 ( Calculation are shown above)

Cash paid for taxes in year 3 to 10 = 1.8

In year 1 & 2 Amt. is credited to DTL each year = 0.8

In year 1 & 2 Amt. is Debited to DTL each year = 0.2

Please note all values are in $.

In case of any clarification required please comment.

May be that presentation will not be suitable to you, will clear you if you any query.

New Machine purchased 10 Profit as per SPL Year 0 1 2 3 4 5 6 7 8 9 10 EBITDA -10 5 5 5 5 5 5 5 5 5 5 less - Dep. 1 1 1 1 1 1 1 1 1 1 EBIT -10 4 4 4 4 4 4 4 4 4 4 Tax expenses - Current tax 0.8 0.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 Defferred tax 0.8 0.8 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Profit as per Income tax law Profit as per SPL 4 4 4 4 4 4 4 4 4 4 Dep 1 1 1 1 1 1 1 1 1 1 Profit as per Income tax law 5 5 5 5 5 5 5 5 5 5 Dep as per income tax 3 3 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 EBIT 2 2 4.5 4.5 4.5 4.5 4.5 4.5 4.5 4.5 Tax @40% 0.8 0.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 EAT 1.2 1.2 2.7 2.7 2.7 2.7 2.7 2.7 2.7 2.7 Calcualtion of Defferred tax timing difference opening 0 2 4 3.5 3 2.5 2 1.5 1 0.5 addition L 2 2 0 0 0 0 0 0 0 0 deletion 0 0 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 closing L 2 4 3.5 3 2.5 2 1.5 1 0.5 0 Defference tax liability 0.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 opening balance 0 0.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 transferred to SPL 0.8 0.8 0.2 0.2 0.2 0.2 0.2 0.2 0.2 0.2

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