Question & Answer

If the general objective of our tax system is to raise revenue, why does the income tax allow deductions for charitable contributions and retirement plan contributions?

Five Satins Company purchased a piece of equipment at the beginning of 2011. The equipment cost $430,000. It has an estimated service life of 8 years and an expected salvage value of $70,000. The sum-of-the-years’-digits method of depreciation is being used. Someone has already correctly prepared a depreciation schedule for this asset. This schedule shows that $60,000 will be depreciated for a particular calendar year.

Instructions

Show calculations to determine for what particular year the depreciation amount for this asset will be $60,000.

As noted in Example 1-2, tolls, parking meter fees, and annual licensing fees are not considered taxes.  Can you identify other fees that are similar?  

Presented below is information related to LeBron James Manufacturing Corporation.

Asset Cost Estimated Salvage Estimated Life (in years)

A $40,500 $5,500 10

B 33,600 4,800 9

C 36,000 3,600 9

D 19,000 1,500 7

E 23,500 2,500 6

Instructions

(a) Compute the rate of depreciation per year to be applied to the plant assets under the composite method.

(b) Prepare the adjusting entry necessary at the end of the year to record depreciation for the year.

(c) Prepare the entry to record the sale of asset D for cash of $4,800. It was used for 6 years, and depreciation was entered under the composite method.

To help pay for the city’s new stadium, the city of Birmingham recently enacted a 1 percent surcharge on hotel rooms. Is this a tax?  Why or why not?

George Zidek Corporation bought a machine on June 1, 2012, for $31,000, f.o.b. the place of manufacture. Freight to the point where it was set up was $200, and $500 was expended to install it. The machine’s useful life was estimated at 10 years, with a salvage value of $2,500. On June 1, 2013, an essential part of the machine is replaced, at a cost of $1,980, with one designed to reduce the cost of operating the machine. The cost of the old part and related depreciation cannot be determined with any accuracy.

On June 1, 2016, the company buys a new machine of greater capacity for $35,000, delivered, trading in the old machine which has a fair value and trade-in allowance of $20,000. To prepare the old machine for removal from the plant cost $75, and expenditures to install the new one were $1,500. It is estimated that the new machine has a useful life of 10 years, with a salvage value of $4,000 at the end of that time. (The exchange has commercial substance.)

Instructions

Assuming that depreciation is to be computed on the straight-line basis, compute the annual depreciation on the new equipment that should be provided for the fiscal year beginning June 1, 2016. (Round to the nearest dollar.)

Marlon and Latoya recently started building a house.  They had to pay $300 to the county government for a building permit.  Is the $300 payment a tax?  Why or why not?

Courtney recently received a speeding ticket on her way to the university.  Her fine was $200.  Is this considered a tax?  Why or why not?

Describe some ways in which taxes affect the political process in the United States.

Jackel Industries presents you with the following information. Accumulated

Date Salvage Life in Depreciation Depreciation to Depreciation

Description Purchased Cost Value Years Method 12/31/15 for 2016

Machine A 2/12/14 $142,500 $16,000 10 (a) $33,350 (b)

Machine B 8/15/13 (c) 21,000 5 SL 29,000 (d)

Machine C 7/21/12 75,400 23,500 8 DDB (e) (f)

Machine D 10/12/(g) 219,000 69,000 5 SYD 70,000 (h)

Instructions

Complete the table for the year ended December 31, 2016. The company depreciates all assets using the half-year convention.

Muggsy Bogues Company purchased equipment for $212,000 on October 1, 2014. It is estimated that the equipment will have a useful life of 8 years and a salvage value of $12,000. Estimated production is 40,000 units and estimated working hours are 20,000. During 2014, Bogues uses the equipment for 525 hours and the equipment produces 1,000 units.

Instructions

Compute depreciation expense under each of the following methods. Bogues is on a calendar-year basis ending December 31.

(a) Straight-line method for 2014.

(b) Activity method (units of output) for 2014.

(c) Activity method (working hours) for 2014.

(d) Sum-of-the-years’-digits method for 2016.

(e) Double-declining-balance method for 2015.

Robert Parish Corporation purchased a new machine for its assembly process on August 1, 2014. The cost of this machine was $117,900. The company estimated that the machine would have a salvage value of $12,900 at the end of its service life. Its life is estimated at 5 years, and its working hours are estimated at 21,000 hours. Year-end is December 31.

Instructions

Compute the depreciation expense under the following methods. Each of the following should be considered unrelated.

(a) Straight-line depreciation for 2014.

(b) Activity method for 2014, assuming that machine usage was 800 hours.

(c) Sum-of-the-years’-digits for 2015.

(d) Double-declining-balance for 2015.

Jon Seceda Furnace Corp. purchased machinery for

$315,000 on May 1, 2014. It is estimated that it will have a useful life of 10 years, salvage value of $15,000, production of 240,000 units, and working hours of 25,000. During 2015, Seceda Corp. uses the machinery for 2,650 hours, and the machinery produces 25,500 units.

Instructions

From the information given, compute the depreciation charge for 2015 under each of the following methods. (Round to the nearest dollar.)

(a) Straight-line. (d) Sum-of-the-years’-digits.

(b) Units-of-output. (e) Declining-balance (use 20% as the annual rate).

(c) Working hours.

Judds Company purchased a new plant asset on April 1, 2014, at a cost of $711,000. It was estimated to have a service life of 20 years and a salvage value of $60,000. Judds’ accounting period is the calendar year.

Instructions

(a) Compute the depreciation for this asset for 2014 and 2015 using the sum-of-the-years’-digits method.

(b) Compute the depreciation for this asset for 2014 and 2015 using the double-declining-balance method.

Rembrandt Company acquired a plant asset at the beginning of Year 1. The asset has an estimated service life of 5 years. An employee has prepared depreciation schedules for this asset using three different methods to compare the results of using one method with the results of using other methods. You are to assume that the following schedules have been correctly prepared for this asset using (1) the straight-line method, (2) the sum-of-the-years’-digits method, and (3) the double-declining-balance method.

Year Straight-Line Years’-Digits Balance

1 $ 9,000 $15,000 $20,000

2 9,000 12,000 12,000

3 9,000 9,000 7,200

4 9,000 6,000 4,320

5 9,000 3,000 1,480

Total $45,000 $45,000 $45,000

Instructions

Answer the following questions.

(a) What is the cost of the asset being depreciated?

(b) What amount, if any, was used in the depreciation calculations for the salvage value for this asset?

(c) Which method will produce the highest charge to income in Year 1?

(d) Which method will produce the highest charge to income in Year 4?

(e) Which method will produce the highest book value for the asset at the end of Year 3?

(f) If the asset is sold at the end of Year 3, which method would yield the highest gain (or lowest loss) on disposal of the asset?

Deluxe Ezra Company purchases equipment on January 1, Year 1, at a cost of $469,000. The asset is expected to have a service life of 12 years and a salvage value of $40,000.

Instructions

(a) Compute the amount of depreciation for each of Years 1 through 3 using the straight-line depreciation method.

(b) Compute the amount of depreciation for each of Years 1 through 3 using the sum-of-the-years’- digits method.

(c) Compute the amount of depreciation for each of Years 1 through 3 using the double-declining-balance method. (In performing your calculations, round constant percentage to the nearest one-hundredthof a point and round answers to the nearest dollar.)

Francis Corporation purchased an asset at a cost of $50,000 on March 1, 2014. The asset has a useful life of 8 years and a salvage value of $4,000. For tax purposes, the MACRS class life is 5 years. Compute tax depreciation for each year 2014–2019.

What are some aspects of business that require knowledge of taxation?  What are some aspects of personal finance that require knowledge of taxation?

In its 2011 annual report, Campbell Soup Company reports beginning-of-the-year total assets of

$6,276 million, end-of-the-year total assets of $6,862 million, total sales of $7,719 million, and net income of $805 million. (a) Compute Campbell’s asset turnover. (b) Compute Campbell’s profit margin on sales. (c) Compute Campbell’s return on assets using (1) asset turnover and profit margin and (2) net income.

Everly Corporation acquires a coal mine at a cost of $400,000. Intangible development costs total $100,000. After extraction has occurred, Everly must restore the property (estimated fair value of the obligation is $80,000), after which it can be sold for $160,000. Everly estimates that 4,000 tons of coal can be extracted. If 700 tons are extracted the first year, prepare the journal entry to record depletion.

Jurassic Company owns equipment that cost $900,000 and has accumulated depreciation of $380,000. The expected future net cash flows from the use of the asset are expected to be $500,000. The fair value of the equipment is $400,000. Prepare the journal entry, if any, to record the impairment loss.

Holt Company purchased a computer for $8,000 on January 1, 2013. Straight-line depreciation is used, based on a 5-year life and a $1,000 salvage value. In 2015, the estimates are revised. Holt now feels the computer will be used until December 31, 2016, when it can be sold for $500. Compute the 2015 depreciation.

Jessica’s friend Zachary once stated that he couldn’t understand why someone would take a tax course.  Why is this a rather naïve view?

Dickinson Inc. owns the following assets.

Asset Cost Salvage Estimated Useful Life

A $70,000 $7,000 10 years

B 50,000 5,000 5 years

C 82,000 4,000 12 years

Compute the composite depreciation rate and the composite life of Dickinson’s assets.

Cominsky Company purchased a machine on July 1, 2015, for $28,000. Cominsky paid $200 in title fees and county property tax of $125 on the machine. In addition, Cominsky paid $500 shipping charges for delivery, and $475 was paid to a local contractor to build and wire a platform for the machine on the plant floor. The machine has an estimated useful life of 6 years with a salvage value of $3,000. Determine the depreciation base of Cominsky’s new machine. Cominsky uses straight-line depreciation.