Chapter 8 Accounting for Depreciation and Income Taxes

8.1: (d)
Given: I = $45,000, S = $5,000, N = 4 years, and SL depreciation
Find: B2
($45, 000 $5, 000)
= $10, 000
4
B2 = B0 D1 D2 = $45, 000 2($10, 000)

D1 = D2 =

= $45, 000 $20, 000 = $25, 000

___________________________________________________________________
8.2: (b)
Given: I = $45,000, S = $5,000, N = 4 years, and DB depreciation
Find: D2
Step 1: Find the declining balance rate () to be used.
1
= 2( ) = 50%
4
Step 2: Find the depreciation amount each year as follows.
D1 = 0.5($45, 000) = $22,500
D2 = 0.5($45, 000 D1 ) = $11, 250
___________________________________________________________________

8.3: (b)
Given: I = $45,000, S = $10,000, N = 4 years, and 200% DB depreciation
Find: B3

1
= 2( ) = 50%
4
D1 = 0.5($45, 000) = $22,500
D2 = 0.5($45, 000 D1 ) = $11, 250
D3 = 0.5($45, 000 D1 D2 ) = $5, 625
B3 = B2 D3 = $11, 250 $5, 625 = $5, 625 < S
Recalculated D3 and B3 :
D3 = $1, 250
B3 = $10, 000

_________________________________________________________________________

8.4: (b)
Given: I = $20,000, S = $2,000, and N = 200,000 miles
Find: Depreciation rate

$20, 000 $2, 000

= $0.09 per mile
200, 000 miles
___________________________________________________________________
depreciation rate =

8.5: (a)
Given: I = $170,000, site preparation = $30,000, market price = $70,000 at
end of year 4, and 7-year MACRS depreciation
Find: B4
Depreciation base = $170,000 + $30,000 = $200,000

B4 = $200, 000 ( D1 + D2 + D3 + D4 )
= $200, 000 $200, 000(0.1429 + 0.2449 + 0.1749 + 0.1249)
= $62, 480
___________________________________________________________________

8.6: (d)
Given: I = $200,000, land = $100,000, placed in service = January, 2006,
and 39-year MACRS depreciation
Find: D1

D1 =

$200, 000 11.5

= $4,915
39
12

___________________________________________________________________

8.7: (b)
Given: I = $200,000, trade-in value = $21,000, N = 5 years S = $25,000,
book value for the traded asset = $144,000, original price of the traded asset
= $180,000
Find: Cost basis for the new asset

Book value for the traded-in asset = $144,000

Implied salvage value = $180,000 - $144,000 = $36,000
Unrecognized loss = $36,000 - $21,000 = $15,000
New cost basis for the new asset = $200,000 + $15,000 = $215,00
___________________________________________________________________
8.8: (c)
Given: Accounting information as provided above
Find: net income in year 1
Tugboat Project
Operating revenue
Operating expenses
Depreciation
Taxable income
Income taxes (30%)
Net income

Tax Year 1
$200,000
84,000
4,000
112,000
33,600
$78,400

___________________________________________________________________
8.9: (a)
Given: net income = $78,400 and depreciation = $4,000
Find: net cash flow in year 1
Net cash flow from operation = net income + depreciation
= $78,400 + $4,000
= $82,400
___________________________________________________________________
8.10: (c)
Given: I = $100,000, S = $20,000, N = 5 years, 3-year MACRS
depreciation, annual revenue = $110,000, net cash flow at year 5 = $30,000,
and income tax rate = 40%
Find: the operating and maintenance expenses in year 5.
The depreciation expense for year 5 will be zero as the asset would be fully
depreciated by then. Therefore, the book value at year 5 will be zero as well.
The entire $20,000 is treated as an ordinary income.

Revenue
Salvage value

Net Income
$110,000
20,000

Expenses:
O&M
Depreciation
Taxable income
Income taxes
Net income
Net cash flow

X
0
$130,000 X
$52,000 0.4X
$78,000 0.6X
$30,000

Note that the net cash flow is obtained by adding the non-cash expenses
(depreciation) to net income,
$30,000 = $78,000 0.6X + Depreciation ($0)
X = $80,000

2008 Pearson Education, Inc., Upper Saddle River, NJ. All rights reserved.
This publication is protected by Copyright and written permission should be obtained from the publisher prior to any prohibited reproduction,
storage in a retrieval system, or transmission in any form or by any means, electronic, mechanical, photocopying, recording, or likewise.
For information regarding permission(s), write to: Rights and Permissions Department, Pearson Education, Inc., Upper Saddle River, NJ
07458.