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 $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.

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