Question

Equipment associated with manufacturing small railcars had a first cost of $190,000 with an expected salvage value of $30,000 at the end of its 5-year life. The revenue was $606,000 in year 2, with operating expenses of $98,000. If the company’s effective tax rate was 32%, what would be the difference in taxes paid in year 2 if the depreciation method were straight line instead of Modified Accelerated Cost Recovery System (MACRS)? The MACRS depreciation rate for year 2 is 32%.

The difference in taxes paid is determined to be $___________

Answer 1

Answer:

By straight line method

Dep = (190,000-30,000)/5=32,000

In 2 year

Revenue            606,000

Expence              - 98,000

Depreciation       - 32,000

EBT                     476,000

tax@32%           152,320

in marr method dep=0.32*190,000=60,800

Revenue             606,000

Expence              - 98,000  

Depreciation        -60,800

EBT                      4,47,200

tax@32%             1,43,104

difference in tax paid=152,320-1,43,104

                                   = $9216

The difference in taxes paid is determined to be $9,216