Johnson Family Care Inc. is a large ambulatory care center that provides compreh
ID: 2637945 • Letter: J
Question
Johnson Family Care Inc. is a large ambulatory care center that provides comprehensive 24-hour primary and specialty care to a large suburban population in Pennsylvania. The center recently purchased new clinical laboratory equipment for $1.1 million and spent $22,000 to renovate a center room to accommodate the new equipment. The useful life of the equipment is estimated to be ten years, after which it can be sold for $75,000. Johnson uses a straight-line method to calculate book depreciation and pays tax at a rate of 40 percent. The equipment falls into the MACRS seven-year class.
What annual depreciation expense will be reported on the income statement for the center?
What annual depreciation expense will be reported for tax purposes?
c. Suppose Johnson sells the laboratory equipment at the end of Year 4 for $400,000. What impact would this have on the taxes paid by the center?
Explanation / Answer
Particulars/Year 0 1 2 3 4 5 6 7 8 9 10 Initial Investment 1100000 Renovation expenses 22000 Depriciation in Straightline=(1100000-75000)/10 102500 102500 102500 102500 102500 102500 102500 102500 102500 102500 Tax shield=0.40* Deprication 41000 41000 41000 41000 41000 41000 41000 41000 41000 41000 Depriciation % as per MACRS 14.29 24.49 17.49 12.49 8.93 8.92 8.93 4.46 Depriciation on 1100000 157190 269390 192390 137390 98230 98120 98230 49060 Depriciation upto 4th Year 756360 Book Value=1100000-756360 343640 Profit on sale=400000-343640 56360 Tax on the Sale=0.40*56360 22544
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