Question

A company purchases a used item of equipment for $35,000. Its remaining useful life is estimated to be 6 years, and salvage is estimated to be $5000 at the end of its useful life.

Prepare a table that shows its depreciation expense, accumulated depreciation, and net book value for each year of its estimated useful life, one using the straight-line method, and one using double-declining balance.

Straight-line    Cost of $35,000 – Salvage 0f $5,000 = $30,000 divided by 6 years = $5000/year

Double-declining balance

                        Cost                 Depr expense              Accumulated depr                 NBV

$35,000	$11,667	$11,667	$23,333
	7,778	19,445	15,555
	5,185	24,630	10,370
	3,457	28,087	6,913
	1,913	30,000	5,000
	-0-	30,000	5,000

Assuming income before depreciation and taxes is $100,000 each year and the company’s effective tax rate is 20%, the company uses straight-line calculate the tax for book and double-declining balance for the tax return, calculate the tax expense and the tax paid for each year.

Answer 1

We use Book depreciation(Straight Line) to calculate Income Tax Expense

We use Tax depreciation(DDB ) to calculate Income Tax Paid