Question

Perform the exercises listed below:
You must use the required formulas the same as the corresponding tables:
I. Problem
Depreciation
Original Cost $ 400,000 Estimated
 Useful life 5 years
Salvage Value $ 0
Instructions
A. Use the following Depreciation methods
1. Straight line
2. Double Declining Balance
3. Sum of the years
4. Modified accelerated Cost Recovery
B. Calculate which Depreciation method will be more advantageous at the end of the first year, from the tax and payment point of view:
The data for the evaluation are:
Income Statement
Revenues (Sales) $ 500,000
Cost of Goods Sold 100,000
Operating Expenses:
Miscellaneouns Expenses 60,000
Depreciation Expenses?
Incometax 20%
* Accelerated Cost Recovery (use the same Depreciation percentages from the class demonstration)


II - Problem - Sale of Bonds or Shares
Evaluate what is the best alternative in the sale of these documents. At the end of the first year of operations. The data are:

* Net Income $ 950,000
* Sale of $ 1,800,000 in Bonds paying an interest of 7%
* Stock sale of $ 1,800,000 paying a 7% dividend
* Income tax 20%
III- Problem Buying Bonds or Stock
Calculate which is the best alternative between buying Bonds worth $ 1,200,000 earning 5% interest, or Buying Stock worth $ 1,200,000 earning a dividend of 5%
* Tax Rate 20%
* Apply the 3 cases A, B, C to evaluate the Stock

Answer 1

Problem.I

Cost of asset = 400000

Usefull life = 5

Salvage value = 0

Depreciation Under Stright line Method for 1st Year:

Depreciation = (Cost of asset-salvage value)/Useful life of asset

=400000/5

= 80000

Depreciation Under Double Declining Balance Method for 1st Year:

Depreciation = 2* Depreciation percentage as per SLM *Original cost of asset

= 2*20%*400000

= 160000

Depreciation Under Sum of years  Method for 1st Year:

Total Years = 5

Sum of total years = 5+4+3+2+1=15

Dep for 1st year = 400000*5/15

= 133333

Depreciation Under Modified Accelerated cost recovery  Method for 1st Year:

Depreciation = 400000*20%

=80000

Statement showing calculation of tax by using different dep Methods

Particulars SLM Double Declinnig Sum of Years MACRS

Sales 500000 500000 500000 500000

(-)Cost of goods 100000 100000 100000 100000

Gross profit 400000 400000   400000 400000

(-)Operating Exp. 60000 60000 60000 60000

(-) Depreciation 80000 160000 133333 80000

Prfit before tax 260000 180000 206667 260000

(-)Tax@20% 52000 36000 41333 52000

Profit after tax 208000 144000 165334 208000

Double Declicing method is advisable since payment of tax is low compared to others