Question
In: Finance
Depreciation expense. Richardses' Tree Farm, Inc. has just purchased a new aerial tree trimmer for...
Depreciation expense. Richardses' Tree Farm, Inc. has just purchased a new aerial tree trimmer for $91 comma 000. Calculate the depreciation schedule using a seven-year life (for the property class category of a single-purpose agricultural and horticultural structure from Table 10.3) for both straight-line depreciation and MACRS, LOADING.... Use the half-year convention for both methods. Compare the depreciation schedules before and after taxes using a 40% tax rate. What do you notice about the difference between these two methods? Using a seven-year life, straight-line depreciation, and the half-year convention for the first and last years, what is the annual depreciation of the trimmer?
Solutions
Expert Solution
Annual straight line depreciation is cost of tree-trimmer divided by 7; $91,000/ 7 = $13,000
the first year would be $6,500 and the eighth year $6,500 (half year convention) and the other years $13,000.
Depreciation schedule Using MACRS
| Year | Tax rate | Depreciation |
| 1 | 14.29% | 13003.9 |
| 2 | 24.49% | 22285.9 |
| 3 | 17.49% | 15915.9 |
| 4 | 12.49% | 11365.9 |
| 5 | 8.93% | 8126.3 |
| 6 | 8.93% | 8126.3 |
| 7 | 8.93% | 8126.3 |
| 8 | 4.46% | 4049.5 |
Comparing the two depreciation schedules before and after taxes (at 40%):
| Year | Straight line | MACRS | Before Tax | After Tax |
| 1 | 6500 | 13003.9 | 6503.9 | 2601.56 |
| 2 | 13000 | 22285.9 | 9285.9 | 3714.36 |
| 3 | 13000 | 15915.9 | 2915.9 | 1166.36 |
| 4 | 13000 | 11365.9 | -1634.1 | -653.64 |
| 5 | 13000 | 8126.3 | -4873.7 | -1949.48 |
| 6 | 13000 | 8126.3 | -4873.7 | -1949.48 |
| 7 | 13000 | 8126.3 | -4873.7 | -1949.48 |
| 8 | 6500 | 4049.5 | -2450.5 | -980.2 |
| Total | 91000 | 91000 | 0 | 0 |
The difference is that the MACRS moves up the tax shield to the early years of depreciation yet the total tax shield is the same under both depreciation schedules
jeff jeffy answered 1 year agoRelated Solutions
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