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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 $95,000. Calculate the depreciation schedule using a seven-year life for both straight-line depreciation and MACRS, 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?

1. 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?

(Round to the nearest dollar.)

2. Using a seven-year life, straight-line depreciation, and the half-year convention for the first and last years, what is the depreciation for the first and last years?

(Round to the nearest dollar.)

3. Using a seven-year life and MACRS depreciation,, what is the annual depreciation of the trimmer for year 1?

(Round to the nearest dollar.)

4. What is the annual depreciation of the trimmer for year 2?

(Round to the nearest dollar.)

5. What is the annual depreciation of the trimmer for year 3?

(Round to the nearest dollar.)

6. What is the annual depreciation of the trimmer for year 4?

(Round to the nearest dollar.)

7. What is the annual depreciation of the trimmer for year 5?

(Round to the nearest dollar.)

8. What is the annual depreciation of the trimmer for year 6?

(Round to the nearest dollar.)

9. What is the annual depreciation of the trimmer for year 7?

(Round to the nearest dollar.)

10. What is the annual depreciation of the trimmer for year 8?

(Round to the nearest dollar.)

11. Compare the depreciation schedules before and after taxes using a 40% tax rate. What do you notice about the difference between these two methods? (Select the best response.)

A.

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.

B.

The difference is that the Straight-line moves up the tax shield to the early years of depreciation yet the total tax shield is the same under both depreciation schedules.

Solutions

Expert Solution

1)	Annual depreciation = 95000/7 =	$ 13,571
2)	Depreciation for 1st year and last year = 13571/2 =	$ 6,786
3 to 10)	Depreciation under MACRS 7 is calculated below for years 1 to 8, with half year convention:
	Year 1	Depreciation %	Depreciation
	1	14.29	$ 13,576
	2	24.49	$ 23,266
	3	17.49	$ 16,616
	4	12.49	$ 11,866
	5	8.93	$ 8,484
	6	8.92	$ 8,474
	7	8.93	$ 8,484
	8	4.46	$ 4,237
	Total depreciation		$ 95,000
11)	Comparison of depreciation before and after taxes
	Year 1	Straight line			MACRS
		Depreciation	Tax shield at 40%	After tax depreciation	Depreciation	Tax shield at 40%	After tax depreciation
	1	$ 6,786	$ 2,714	$ 4,071	$ 13,576	$ 5,430	$ 8,145
	2	$ 13,571	$ 5,429	$ 8,143	$ 23,266	$ 9,306	$ 13,959
	3	$ 13,571	$ 5,429	$ 8,143	$ 16,616	$ 6,646	$ 9,969
	4	$ 13,571	$ 5,429	$ 8,143	$ 11,866	$ 4,746	$ 7,119
	5	$ 13,571	$ 5,429	$ 8,143	$ 8,484	$ 3,393	$ 5,090
	6	$ 13,571	$ 5,429	$ 8,143	$ 8,474	$ 3,390	$ 5,084
	7	$ 13,571	$ 5,429	$ 8,143	$ 8,484	$ 3,393	$ 5,090
	8	$ 6,786	$ 2,714	$ 4,071	$ 4,237	$ 1,695	$ 2,542
	Total	$ 95,000	$ 38,000	$ 57,000	$ 95,000	$ 38,000	$ 57,000
	A. 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 10 months ago

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