Professional Documents
Culture Documents
ISBN: 0-13-611848-8
2011 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
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The loss of value is defined as the purchase price of an asset less its market
value, also known as economic depreciation. Economic depreciation = $20,000
- $7,000 = $13, 000
9.2
Cost Basis
9.3
Land
$155,000
$155,000
Building
$245,000
$1,250,000
$15,000
$1,510,000
9.4
$1,200,000
$20,000
$15,000
$45,000
$24,000
$3,500
$1,307,500
Page | 1
9.5
Unrecognized profit
Old drill press (Book value)
Trade-in allowance
Unrecognized loss
$46,220
$40,000
$6,220
Cost basis
Cost of new drill
Plus: unrecognized loss
Cost basis of new drill
$148,000
$6,220
$154,200
Comments: If the old drill were sold on the market (instead of trade-in), there
would be no unrecognized loss. In that situation, the cost basis for the new drill
would be $148,000.
9.6
Unrecognized profit
Old lift truck (Book value)
Trade-in allowance
Unrecognized gains
$7,808
$9,000
$1,192
Cost basis
Cost of new truck
Minus: unrecognized gains
Cost basis of new truck
$38,000
$1,192
$36,808
Comments: If the old truck were sold on the market (instead of trade-in), there
would be no unrecognized gains. In that situation, the cost basis for the new
drill would be $38,000.
(a) SL
Dn
(b) DDB
Bn
Dn
Bn
$27,000
$138,000
$66,000
$99,000
$27,000
$111,000
$39,600
$59,400
$27,000
$84,000
$23,760
$35,640
$27,000
$57,000
$5,640
$30,000
$27,000
$30,000
$30,000
Page | 2
9.8
= 2( ) = 0.25
= $17,578
9.9
Dn
Bn
1
2
3
4
5
6
7
$20,857
$14,898
$10,641
$7,601
$5,429
$5,287
$5,287
$52,143
$37,245
$26,603
$19,002
$13,573
$8,287
$3,000
Bn
1
2
3
4
$29,333
$19,556
$13,037
$8,691
$58,667
$39,111
$26,074
$17,383
$4,383
$13,000
$0
$13,000
Comments: If the regular DDB deduction were taken during the fifth year,
B5 would be less than the salvage value. Therefore, it is necessary to adjust D5 .
The number in the box represents the adjusted value. No switching is common for
this type of situation whenever the salvage value is high.
Page | 3
Dn
1
2
3
4
5
6
7
8
$61,500
$46,125
$34,594
$25,945
$19,459
$14,594
$7,783
0
Bn
$184,500
$138,375
$103,781
$77,836
$58,377
$43,783
$36,000
$36,000
9.12
1
(a) = 2 = 0.4
5
(b) D2 = (0.4)(0.6)(36, 000) = $8, 640
(c) B4 = (36, 000)(1 0.4) 4 = $4, 665.60
(a) SL
1
2
3
4
5
(b) DDB
$10,000
$10,000
$10,000
$10,000
$10,000
$22,000
$13,200
$7,920
$4,752
$2,128
(a)
D=
(b)
D3 = $6, 481
Page | 4
Units-of-Production Method
9.15 Allowed depreciation amount
D=
9.16
D5,000 hours =
9.17
(a) Straight line: D1 =
(b) UP: D1 =
(d) DDB(without conversion to SL): D1 = 0.2(157, 000) = 31, 400; B1 = $125, 600
(e) DDB(with conversion to SL): D1 = 0.2(157, 000) = 31, 400; B1 = $125, 600
Note that: (d) and (e) are indifferent in year 1.
Tax Depreciation
9.18 Given: I = $265,000, Delivery and installment costs =$46,000, N = 12 years,
and 7-year MACRS
(a) Cost basis = $265,000 + $46,000 = $311,000
Page | 5
(b)
n
MACRS Depreciation
1
2
3
4
5
6
7
8
$44,442
$76,164
$54,394
$38,844
$27,772
$27,741
$27,772
$13,855
Book Depreciation
MACRS Depreciation
1
2
3
4
5
6
7
8
$3,625
$3,625
$3,625
$3,625
$3,625
$3,625
$3,625
$3,625
$7,000
$11,200
$6,720
$4,032
$4,032
$2,016
-
9.20 (a) Cost basis: $190, 000 + $25, 000 = $215, 000
(b)
D1 = $13,147
D2 = $22,531
D3 = $16, 091
D4 = $11, 491
D5 = $8, 216
SL
MACRS
Dn
Dn
Bn 1
Dn
1
2
$50, 000
$41, 667
$8,333
$13,889
6.5 $7692
5.5 $7,576
$8,333
$13,889
$27, 778
$9, 259
4.5
$6,173
$9, 259
$18,519
$6,173
$6,173
$12,346
$4,115
2.5 $4,938
$4,938
1.5 $4,938
0.5 $2, 469
$4,938
$2, 469
6
7
life
9.25 Since the land is not depreciable, just consider the building depreciations.
Given: I = $250,000, tax depreciation method = 27.5-year MACRS property
Page | 7
Depreciation
Allowed
rate
depreciation
n
1
2.5758%
$6,439
2
3.6364%
$9,091
3
3.6364%
$9,091
4
3.6364%
$9,091
5
3.1818%
$7,955
7 $2,947
8 $1, 472
9.27 Given: Residential real property (27.5-year), I = $270,000
(a)
100% 2.5
D1 =
27.5 12
= (0.00758)($270, 000) = $2, 045
(b) Total amount of depreciation over the 4-year ownership, assuming that the
asset is sold at the end of 4th calendar year:
n
Rate
Dn
1 0.7576% $2,045
2 3.6364% $9,818
3 3.6364% $9,818
4 3.4848% $9, 049
Total amount of depreciation allowed = $31,091. Note that the 4th year
depreciation reflects the mid-month convention (11.5 months).
B4 = $270, 000 $31, 091 = $238,909
Page | 8
9.28
Types of Asset
Depreciating Methods
End of year
Initial Cost ($)
Salvage value ($)
Book value ($)
Depreciation life
Depreciable Amount ($)
Accumulated Depreciable ($)
I
SL
6
30,000
6,000
12,000
8 yr
3,000
18,000
II
DDB
3
25,000
5,000
5,400
5 yr
3,600
19,600
III
UP
3
41,000
5,000
20,500
90,000 mi
6,000
18,000
IV
MACRS
4
20,000
2,000
3,456
5 yr
2,304
16,544
9.29
(a) Book depreciation methods:
Straight-line method:
n
1
2
3
4
5
Dn
Bn
Cum. Dn
$15,800
$73,200
$15,800
$15,800
$15,800
$57,400
$41,600
$31,600
$47,400
$15,800
$25,800
$63,200
$15,800
$10,000
$79,000
DDB method:
n
1
2
3
4
5
Dn
Cum. Dn
Bn
$35,600
$53,400
$35,600
$21,360
$12,816
$7,690
$1,534
$32,040
$19,224
$11,534
$10,000
$56,960
$69,776
$77,466
$79,000
1
2
3
4
5
6
7
8
Dn
Cum. Dn
Bn
$12,718
$76,282
$12,718
$21,796
$15,566
$54,486
$38,920
$34,514
$50,080
$11,116
$27,804
$61,196
$7,948
$7,939
$19,856
$11,917
$69,144
$77,083
$7,948
$3,969
$85,031
$3,969
$0
$89,000
Page | 9
$38,920
$20,000
Unrecognized loss
($18,920)
$92,000
$18,920
$110,920
Comments: If the old equipment were sold on the market (instead of trade-in),
there would be no unrecognized loss. In that situation, the cost basis for the new
equipment would be just $92,000. No half-year convention is assumed in this
analysis.
Depletion
9.30
(a)
z Ore mine:
z Mining equipment:
$2,500, 000
= $0.625 per ton
4, 000, 000
(b)
z For tax year 2009:
9.31
$600, 000
= $88, 235.29 per MBF
6.8
Total depletion allowance = $88, 235.29(1.5) = $132,352.94
Page | 10
$48,365,000
15%
$7,254,750
Percentage depletion:
Gross Income
Expenses
$48,365,000
$22,250,000
Taxable income
Deduction limit
$26,115,000
50%
$13,057,500
Cost depletion =
9.33
(a) Cost basis:
z Parcel A:
z Parcel B:
Gross Income
Expenses
$72,000,000
$3,600,000
Taxable income
Deduction limit
$68,400,000
$34,200,000
50%
Page | 11
Gross Income
Depletion
Computed % depletion
$75,000,000
15%
$11,250,000
Gross Income
Expenses
$75,000,000
$3,600,000
Taxable income
Deduction limit
$71,400,000
50%
$35,700,000
The allowable percentage deduction is $11,250,000.
(d) Percentage depletion versus cost depletion for parcel B in year 2010
zCost depletion: $4.80(800, 000) = $3,840, 000
z Percentage depletion:
Gross income = $75 800,000 = $60,000,000
Gross Income
Depletion
Computed % depletion
$60,000,000
15%
$9,000,000
Gross Income
Expenses
$60,000,000
$3,000,000
Taxable income
Deduction limit
$57,000,000
50%
$28,500,000
The allowable percentage deduction is $9,000,000.
During year 2010, Oklahoma Oil claimed its depletion deduction in the amount of
$9,000,000 from parcel B.
Page | 12
9.34
(a) Cost depletion:
$30, 000, 000
= $4.6154 per ton
6,500, 000
Depletion cost = $4.6154(1, 000, 000) = $4, 615, 400
Cost per ton =
$15,000,000
10%
$1,500,000
Gross Income
Expenses
$15,000,000
$1,850,000
Taxable income
Deduction limit
$13,150,000
50%
$6,575,000
n=
9.36
(a) Book depreciation amount for 2010:
2008
2009
2010
2011
Dn
Bn
Cum. Dn
$10,688
$78,813
$10,688
$10,688
$10,688
$10,688
$68,125
$57,438
$46,750
$21,375
$32,063
$42,750
Page | 14
2008
2009
2010
2011
Dn
Cum. Dn
Bn
$12,790
$76,710
$12,790
$21,919
$15,654
$11,179
$54,792
$39,138
$27,960
$34,708
$50,362
$61,540
Comments: The accessories costing $5,000 that were incurred in 2006 do not
change the depreciation schedule, because these neither extended the machines
life nor resulted in any additional salvage value.
35,000,000
$
$
$
$
$
$
6,000,000
7,000,000
800,000
150,000
21,050,000
7,367,499
Net income
13,682,501
9.39
(a) Taxable income = $8,500,000 - $2,280,000 - $456,000 = $5,764,000
(b) Income tax calculation using tax formula
(c)
Income taxes = $113,900 + 0.34(5,764,000 - 335,000) = $1,959,760
Page | 15
9.40
(a) Income tax liability:
Gross revenues
Expenses:
Manufacturing
Operating
Interest
$ 3,500,000
$
$
$
$ 2,490,000
$
15,000
Taxable income
Income taxes
$ 2,475,000
$ 841,500
Net income
$ 1,633,500
650,000
320,000
40,000
$ 2,490,000
$ 846,600
$ 1,643,400
Gains or Losses
9.41
Page | 16
9.43
9.44
Allowed depreciation = $50, 000(0.2 + 0.32 + 0.192 + 0.1152 / 2)
= $38, 480
Book value = $50, 000 $38, 480
= $11,520
Page | 17
2010
2011
2012
Dn
Bn
Cum. Dn
$7,500
$72,500
$7,500
$7,500
$7,500
$65,000
$57,500
$15,000
$22,500
2010
2011
2012
Dn
Bn
Cum. Dn
$20,000
$60,000
$20,000
$15,000
$11,250
$45,000
$33,750
$35,000
$46,250
2010
2011
2012
2013
2014
Dn
Bn
Cum. Dn
$7,500
$72,500
$7,500
$7,500
$7,500
$7,500
$65,000
$57,500
$50,000
$15,000
$22,500
$30,000
$7,500
$42,500
$37,500
DDB Method
n
2010
2011
2012
2013
2014
Dn
Bn
Cum. Dn
$20,000
$60,000
$20,000
$15,000
$11,250
$8,438
$45,000
$33,750
$25,313
$35,000
$46,250
$54,688
$6,328
$18,984
$61,016
Page | 18
$80,000
$28,580
Taxable
income
$51,420
$80,000
$48,980
$31,020
$456,020
34%
$80,000
$34,980
$45,020
$470,020
34%
$80,000
$24,980
$55,020
$480,020
34%
$80,000
$17,860
$62,140
$487,140
34%
$80,000
$8,920
$71,080
$496,080
34%
Revenue
Dn
Combined
Marginal
income
rate
$476,420
34%
Combined income
$476,420
$456,020
$470,020
$480,020
$487,140
$496,080
Revenue
Operating costs
Depreciation
Taxable income
Year 1
$220,000
$150,000
$12,000
$58,000
Year 2
$220,000
$150,000
$19,200
$50,800
Page | 19
Year 1
$650,000
$221,000
Year 2
$650,000
$221,000
$708,000
$240,720
$700,800
$238,272
$58,000
$19,720
0.34
$50,800
$17,272
0.34
Comment: Note that the marginal tax rates over the project life remain
unchanged because the additional income from the new project is not large
enough to push the company into a higher tax bracket.
9.48
Good
Economic condition
Fair
Poor
Taxable income
Before expansion
Due to expansion
After expansion
$
$
$
2,500,000 $
2,000,000 $
4,500,000 $
2,500,000 $
500,000 $
3,000,000 $
2,500,000
(100,000)
2,400,000
Income Taxes
1,530,000 $
1,020,000 $
816,000
34%
34%
34%
34%
34%
34%
Year 2
Year 3
Annual revenue
$80,000
$80,000
$80,000
Operating cost
$20,000
$20,000
$20,000
Depreciation
$16,665
$22,225
$3,703
Taxable income
$43,335
$37,775
$56,298
Page | 20
Year 2
Year 3
$350,000
$350,000
$350,000
$119,000
$119,000
$119,000
$393,335
$133,734
$387,775
$131,844
$406,298
$138,141
$43,335
$14,734
34%
$37,775
$12,844
34%
$56,298
$19,141
34%
Page | 21
9.51
(a) Marginal tax rates:
State taxable income = $6,500, 000 $3, 450, 000 $650, 000
= $2, 400, 000
$193,120
State tax rate =
= 8.05%
$2, 400, 000
Federal taxable income = $2, 400, 000 $193,120 = $2, 206,880
(b)
$332, 000
= 15.04%
$2, 206,880
9.52
(a) Additional annual taxable income due to expansion = $30,000
Taxable income in year 1 = $170,000 + $30,000 = $200,000
The marginal tax rate after business expansion is 39%.
(b) Average tax rate after business expansion $61,250/ $200,000 = 30.63%
Note: Income taxes = $22,250+0.39($200,000-$100,000)=$61,250
(c) PW of income taxes:
z Depreciation schedules: depreciation base = $20,000
n
1
2
3
4
MACRS
$ 6,666
$ 8,890
$ 2,962
$ 1,482
Page | 22
Revenue
Expense
Depreciation
Taxable
income
Income taxes
PW(10%)=
Operating Year
Year 1
Year 2
$50,000
$50,000
$20,000
$20,000
$6,666
$8,890
Year 3
$50,000
$20,000
$2,962
$23,334
$21,110
$27,038
$9,100
$22,999
$8,233
$10,545
9.53
n
1
2
3
4
5
6
7
8
Dn
(a) Bn 1
$ 500,150
$ 857,150
$ 612,150
$ 437,150
$ 312,550
$ 312,200
$ 312,550
$ 156,100
$3,500,000
$299,850
$2,142,700
$1,530,550
$1,093,400
$780,850
$468,650
$156,100
(b) Taxes
$42,000
$35,998
$25,712
$18,367
$13,121
$9,370
$5,624
$1,873
Dn
Bn
2004
2005
2006
$8,200
$8,200
$8,200
$76,800
$68,600
$60,400
Page | 23
Dn
Bn
2007
2008
2009
$6,540
$6,540
$6,540
$61,860
$55,320
$48,780
ST 9.2
(a) Depletion basis = $32.5 million - $3 million = $29.5 million
$29,500, 000
= $4.54 per bbl
6,500, 000
Cost depletion for 2009 = $4.54 / bbl 420, 000 bbl = $1,906,800
Cost depletion for 2010 = $4.54 / bbl 510, 000 bbl = $2,315, 400
Depletion allowance per bbl =
Page | 24
ST 9.3
(a) Incremental Operating income:
Year
Revenue
Mfg. Cost
Depreciation
O&M
Taxable Income
Income Tax
7,085,500
2,479,925
6,575,500
2,301,425
6,925,500
2,423,925
7,175,500
2,511,425
7,576,750
2,651,863
Net Income
4,605,575
4,274,075
4,501,575
4,664,075
4,924,888
= $1,338, 750
Taxable gains = $1, 600, 000 $1,338, 750
= $261, 250
ST 9.4
(a) If Diamond invests in the facilities and markets the product successfully, the
expected tax rate in each year will remain at 34%. Since the local and state
taxes are tax-deductible expenses on federal tax calculation purpose, the
combined marginal tax rate is
1
$30,000
2
$30,000
3
$30,000
4
$30,000
5
$30,000
6
$30,000
7
$30,000
8
$30,000
9,000
12000
9,000
12000
9,000
12000
9,000
12000
9,000
12000
9,000
12000
9,000
12000
9,000
12000
246
5716
256
9796
256
6996
256
4996
256
3572
256
3568
256
3572
246
1784
$3,038
152
$2,886
981
($1,052)
-53
($999)
-340
$1,748
87
$1,661
565
$3,748
187
$3,561
1,211
$5,172
259
$4,913
1,671
$5,176
259
$4,917
1,672
$5,172
259
$4,913
1,671
$6,970
349
$6,622
2,251
Net Income
$1,905
($660)
$1,096
$2,350
$3,243
$3,245
$3,243
$4,370
Revenue
Expenses :
Mfg. cost
Operating cost
Depreciation
Building
Equipment
Page | 26