## Quiz 9 :

Accounting for Depreciation and Income Taxes

Answer:

It is given that the initial cost of the drill is $170,000 and its installation costs $30,000. Thus, the total cost of drill on which depreciation is applied is $200,000 ($170,000+$30,000). It is classified as a 7-year MACRS class property. The salvage value at the time of selling, that is, at the end of year-4, is $70,000.

Depreciation rates (7-year MACRS)Table-1 shows the depreciation rates of 7-year MACRS class property for 4 years. Following is the way to calculate the total depreciation allowed: Thus, the total depreciation allowed is $125,030

(NOTE: For a MACRS property, if an asset is disposed during or before its specified period, the year of disposal is charged one-half of that year's annual depreciation amount )Following is the formula to calculate the book value of the machine: Thus, the book value at the end of year-4 is $74,970

The correct option is (D).

Answer:

Given information:

• Price of tugboat is $75,000.

• Salvage value is $12,000 after 5 years.

• Operating revenue is $200,000.

• Operating expense is $84,000.

• Depreciation is $4,000.

• Tax rate is 30 percent.

Net income:

Net income can be calculated by using the following formula. …… (1)Substitute the respective values in Equation (1) to calculate the net income for the first year. Net income for the first year is .

Hence, option (c) is correct.

Answer:

Given information:

• Cost of an asset is $80,000.

• Salvage value is $5,000.

• Life time of the asset is 8 years.

The Double-declining-balance method of depreciation:

Depreciation value can be calculated by using the following formula of the double-declining-balance method. …… (1)Book value:

Book value can be calculated by using the following formula. …… (2)First year depreciation:

Substitute the respective values in equation (1) to calculate the first year depreciation. Depreciation in the first year is .

Book value in the first year:

Substitute the respective values in equation (2) to calculate the first year book value. First year book value is .

Depreciation value and book value:

Hence, by using the Equation (1) and (2), Table-1 shows the depreciation value and book value based on the double-declining-balanced method.Table-1 Note: The depreciation value of double declining method is less than the straight line depreciation value from the year 7 to 8. Thus, there is a switch over the depreciation method from double declining method to straight line method from the year 7. The depreciation value from seventh year can be calculated as follows. Straight line depreciation value is .