Question

In: Accounting

Jamie purchased $100,000 of new office furniture for her business in June of the current year....

Jamie purchased $100,000 of new office furniture for her business in June of the current year. Jamie understands that if she elects to use ADS to compute her regular income tax, there will be no difference between the cost recovery for computing the regular income tax and the AMT. Jamie wants to know the regular income tax cost, after three years, of using ADS rather than MACRS.

Assume that Jamie does not elect § 179 limited expensing and that her combined state and Federal income marginal tax rate is 32%. She does not claim any available additional first-year depreciation.

Assume a 6% discount rate. The present value factors for a 6% discount rate are as follows:

Year PV Factor at 6%
1 1.0000
2 0.9434
3 0.8900
4 0.8396
5 0.7921
6 0.7473
7 0.7050
8 0.6651

If required, round interim computations to two decimal places and use rounded values in subsequent computations. Round your final answer to the nearest dollar.

Click here to access the depreciation tables to use for this problem.

a. What is the covet recovery at the end of three years under MACRS? $

Under ADS? $

What is the present value of the tax cost, after three years, of using ADS rather than MACRS? $.

b. What is the present value of the tax savings/costs that result over the life (8 years) of the asset if Jamie uses MACRS rather than ADS? $.

Solutions

Expert Solution

Year MACRS AMT
Depreciation Rate Depreciation Depreciation Rate Depreciation
1 14.29% $         14,290 10.71% $         10,710
2 24.49% $         24,490 19.13% $         19,130
3 17.49% $         17,490 15.03% $         15,030
4 12.49% $         12,490 12.25% $         12,250
5 8.93% $           8,930 12.25% $         12,250
6 8.92% $           8,920 12.25% $         12,250
7 8.93% $           8,930 12.25% $         12,250
8 4.46% $           4,460 6.13% $           6,130
$       100,000 $       100,000 0
a1 Covet recovery at the end of 3 years electing MACRS $ 56,270.00
Covet recovery at the end of 3 years electing ADS $ 44,870.00
Covet recovery lost by electing ADS after 3 years $ 11,400.00
Tax cost after 3 years (11400*32%) $   3,648.00
a2 PV of Tax cost (3648*0.8396) $   3,062.86
b PV of Tax savings/cost at the end of asset life $               -  

ekkarill92 answered 1 year ago
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