Question

E11-25 Book vs. Tax (MACRS) Depreciation) futabatei enterprises purchased a delivery truck on january 1, 2014, at a cost of $27,000. the truck has a useful life of 7 years with an estimated salvage value of $6,000. The straight-line method is used for book purchases, the truck, having an MACRS class life of 7 years, is classified as 5-year property, the optimal MACRS tax rate tables are used to compute depreciation. in addition, assume that for 2014 and 2015 the company has revenues of $200,000 and operating expenses (excluding depreciation) of $130,000. Instructions.
A. Prepare income statements for 2014 and 2015. (The final amount reported on the income statement should be income before income taxes.)
B. Compute taxable income for 2014 and 2015.
C. Determine the total depreciation to be taken over the useful life of the delivery truck for both book and tax purposes.
D. Explain why depreciation for book and tax purposes will generally be different over the useful life of a depreciation asset.

Answer 1

A. The preparation of the Income Statements for Futabatei Enterprises for years 2014 and 2015 is as follows:

Income Statement

For years ended December 31 2014 and 2015

                                           2014           2015

Revenues                     $200,000    $200,000

Operating expenses      130,000        130,000

Depreciation                      3,000            3,000

Income before tax      $127,000     $127,000

B. Taxable Income for 2014 and 2015:

                                          2014           2015

Income before tax       $127,000      $127,000

Depreciation                     3,000            3,000

MACRS depreciation      (5,400)          (8,640)

Taxable income        $124,600      $121,360

C. The total depreciation to be taken over the useful life of the delivery truck is as follows:

                                          Book            Tax

Total depreciation        $21,000    $27,000

D. The depreciation for book and tax purposes are usually different over the useful life of an asset because of the different depreciation rates and methods.  Companies usually favor one of the depreciation methods for accounting purposes, but they are taxed by a different depreciation method, especially the MACRS method.

Data and Calculations:

Cost of delivery truck = $27,000

Estimated useful life = 7 years

Straight-line Depreciation Method:

Estimated salvage value =$6,000

Depreciable amount = $21,000 ($27,000 - $6,000)

Annual Depreciation = $3,000 ($21,000/7)

MACRS Tax Rate Table:

First year = $5,400 ($27,000 x 20%)

Second year = $8,640 ($27,000 x 32%)

Third year = $5,184 ($27,000 x 19.20%)

Fourth year = $3,110 ($27,000 x 11.52%)

Fifth year = $3,110 ($27,000 x 11.52%)

Six year = $1,556 ($27,000 x 5.76%)

Learn more about depreciation differences for financial accounting and tax purposes at brainly.com/question/15874429