Equipment associated with manufacturing small railcars had a first cost of $230,
ID: 2620665 • Letter: E
Question
Equipment associated with manufacturing small railcars had a first cost of $230,000 with an expected salvage value of $30,000 at the end of its 5-year life. The revenue was $638,000 in year 2, with operating expenses of $98,000. If the company’s effective tax rate was 37%, what would be the difference in taxes paid in year 2 if the depreciation method were straight line instead of Modified Accelerated Cost Recovery System (MACRS)? The MACRS depreciation rate for year 2 is 32%.
The difference in taxes paid is determined to be $ .
Explanation / Answer
Depreciation under MACRS = 230000*32% = $ 73,600 Depreciation under straight line method = (230000-30000)/5 = $ 40,000 Difference in depreciation $ 33,600 Difference in taxes paid = 33600*37% = $ 12,432
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