Please show calculations used to derive the answers for the following 3 question

Question

Please show calculations used to derive the answers for the following 3 questions:

Johnson Family Care Inc. purchased new equipment for $1.1 million and spent $22,000 to renovate room for the new equipment. The usual life of the equipment is estimated to be 10 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%. The equipment falls into the MACRS seven-year class.

1. What annual depreciation expense will be reported on the income statement for the center?

2. What annual depreciation expense will be reported for the tax purposes?

3. 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

1. Annual depreciation expense on the income statement = ($1100000+$22000-$75000) / 10 years

                                                                                                         =$104700

2. Annual depreciation expense for tax purpose = ($1100000+$22000-$75000) / 7 years

                                                                                       =$149571

3. If John sells the equipment at the end of year 4, loss arises on sale of equipment which leads to decrease in net income and which in turn leads to less tax payable.

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