In: Finance
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?
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