Dinkle Company purchased equipment for $50,000. The equipment has an estimated r

Question

Dinkle Company purchased equipment for $50,000. The equipment has an estimated residual value of $5,000 and an expected useful life of 10 years. Dinkle uses straight-line depreciation for its financial statements. Required: What is the difference between the company's income before taxes reported on its financial statements and the taxable income reported on its tax return in each of the first 2 years of the asset's life if the asset was purchased on January 2, 2016, and its MACRS life is 5 years?

Explanation / Answer

Using straight line method, depreciation cost = (Equipment cost - salvage value)/life time

=(50000-5000)/10 = 4,500

Let the revenue after expenses of the Dinkle company on December 31 2016, be X.

Profit before tax = X-4500

Since MACRS for the equipment = 5years

In the 1st year the depreciation rate = 20%

In the year 1, the MACRS depreciation cost = 20% * (Equipment cost - salvage cost)

= 0.2 * (50000-5000) = 0.2*45000 = $9,000

Therefore the taxable income for the year 2016 = X-9000

Difference in the 1st year= (X-4500)-(X-9000) = $4500

Let the revenue after expenses of the Dinkle company on December 31 2017, be Y.

Profit before tax = Y-4500

In the 2nd year the depreciation rate = 20%

In the year 2, the MACRS depreciation cost = 32% * (Equipment cost - salvage cost)

= 0.2 * (50000-5000) = 0.32*45000 = $14,400

Therefore the taxable income for the year 2017 = Y-14400

Difference in the 2nd year = (Y-4500)-(Y-14400) = $9,900

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.