Question
In: Accounting
Engineering Economy Your company was formed to develop virus killing soap during the pandemic. You bought...
Engineering Economy
Your company was formed to develop virus killing soap during the pandemic. You bought land for $300,000, and had a $1,000,000 factory building erected, and installed $500,500 worth of soap research formulation and experimental equipment. The facility was finished on March 1, and the government paid you $500,000 for the virus killing soap. Supplies and operating expenses excluding the capital expenditures were $100,000.
Using MACRS GDS depreciation:
a. What is the first-year taxable income?
b. How much will your corporation pay in Federal income taxes for the first year?
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Expert Solution
| Income Statement for the First Year | Amount |
| Revenue from Govt. | $ 500,000.00 |
| Supplies and Operating Expenses | $ 100,000.00 |
| Depreciation on Land | $ 30,000.00 |
| Depreciation on Building | $ 100,000.00 |
| Depreciation on Experimental Equipment | $ 50,050.00 |
| Net Taxable Income | $ 219,950.00 |
| Tax @ 21% | $ 46,189.50 |
Assumed tax rate of 21% as per te latest tax slab.
Below are the working on depreciation schedule, assuming 10 years of asset life/recovery period.
| Land Depreciation Schedule | ||||||
| Year | Adjusted basis | Rate | Depreciation | Cumulative | Book value | Method |
| 2020 | $ 300,000.00 | 10 | $ 30,000.00 | $ 30,000.00 | $ 270,000.00 | DB |
| 2021 | $ 270,000.00 | 18 | $ 54,000.00 | $ 84,000.00 | $ 216,000.00 | DB |
| 2022 | $ 216,000.00 | 14.4 | $ 43,200.00 | $ 127,200.00 | $ 172,800.00 | DB |
| 2023 | $ 172,800.00 | 11.52 | $ 34,560.00 | $ 161,760.00 | $ 138,240.00 | DB |
| 2024 | $ 138,240.00 | 9.22 | $ 27,648.00 | $ 189,408.00 | $ 110,592.00 | DB |
| 2025 | $ 110,592.00 | 7.37 | $ 22,118.00 | $ 211,526.00 | $ 88,474.00 | DB |
| 2026 | $ 88,474.00 | 6.55 | $ 19,661.00 | $ 231,187.00 | $ 68,813.00 | SL |
| 2027 | $ 68,813.00 | 6.55 | $ 19,661.00 | $ 250,848.00 | $ 49,152.00 | SL |
| 2028 | $ 49,152.00 | 6.55 | $ 19,661.00 | $ 270,509.00 | $ 29,491.00 | SL |
| 2029 | $ 29,491.00 | 6.55 | $ 19,661.00 | $ 290,170.00 | $ 9,830.00 | SL |
| 2030 | $ 9,830.00 | 3.28 | $ 9,830.00 | $ 300,000.00 | $ - | SL |
| Building Depreciation Schedule | ||||||
| Year | Adjusted basis | Rate | Depreciation | Cumulative | Book value | Method |
| 2020 | $ 1,000,000.00 | 10 | $ 100,000.00 | $ 100,000.00 | $ 900,000.00 | DB |
| 2021 | $ 900,000.00 | 18 | $ 180,000.00 | $ 280,000.00 | $ 720,000.00 | DB |
| 2022 | $ 720,000.00 | 14.4 | $ 144,000.00 | $ 424,000.00 | $ 576,000.00 | DB |
| 2023 | $ 576,000.00 | 11.52 | $ 115,200.00 | $ 539,200.00 | $ 460,800.00 | DB |
| 2024 | $ 460,800.00 | 9.22 | $ 92,160.00 | $ 631,360.00 | $ 368,640.00 | DB |
| 2025 | $ 368,640.00 | 7.37 | $ 73,728.00 | $ 705,088.00 | $ 294,912.00 | DB |
| 2026 | $ 294,912.00 | 6.55 | $ 65,536.00 | $ 770,624.00 | $ 229,376.00 | SL |
| 2027 | $ 229,376.00 | 6.55 | $ 65,536.00 | $ 836,160.00 | $ 163,840.00 | SL |
| 2028 | $ 163,840.00 | 6.55 | $ 65,536.00 | $ 901,696.00 | $ 98,304.00 | SL |
| 2029 | $ 98,304.00 | 6.55 | $ 65,536.00 | $ 967,232.00 | $ 32,768.00 | SL |
| 2030 | $ 32,768.00 | 3.28 | $ 32,768.00 | $ 1,000,000.00 | $ - | SL |
| Experimental Equipment Depreciation Schedule | ||||||
| Year | Adjusted basis | Rate | Depreciation | Cumulative | Book value | Method |
| 2020 | $ 500,500.00 | 10 | $ 50,050.00 | $ 50,050.00 | $ 450,450.00 | DB |
| 2021 | $ 450,450.00 | 18 | $ 90,090.00 | $ 140,140.00 | $ 360,360.00 | DB |
| 2022 | $ 360,360.00 | 14.4 | $ 72,072.00 | $ 212,212.00 | $ 288,288.00 | DB |
| 2023 | $ 288,288.00 | 11.52 | $ 57,658.00 | $ 269,870.00 | $ 230,630.00 | DB |
| 2024 | $ 230,630.00 | 9.22 | $ 46,126.00 | $ 315,996.00 | $ 184,504.00 | DB |
| 2025 | $ 184,504.00 | 7.37 | $ 36,901.00 | $ 352,897.00 | $ 147,603.00 | DB |
| 2026 | $ 147,603.00 | 6.55 | $ 32,801.00 | $ 385,697.00 | $ 114,803.00 | SL |
| 2027 | $ 114,803.00 | 6.55 | $ 32,801.00 | $ 418,498.00 | $ 82,002.00 | SL |
| 2028 | $ 82,002.00 | 6.55 | $ 32,801.00 | $ 451,299.00 | $ 49,201.00 | SL |
| 2029 | $ 49,201.00 | 6.55 | $ 32,801.00 | $ 484,100.00 | $ 16,400.00 | SL |
| 2030 | $ 16,400.00 |
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