Question

Dinkle Company purchased equipment for $50,000. The equipment has an estimated residual value of $5,000 and an expected useful life of 10 years. Dinkle uses straight-line depreciation for its financial statements. Required: What is the difference between the company's income before taxes reported on its financial statements and the taxable income reported on its tax return in each of the first 2 years of the asset's life if the asset was purchased on January 2, 2016, and its MACRS life is 5 years?

Answer 1

Year 1

As per company book deprecation: (Equipment cost-Salvage value)/Life time = (50,000 - 5,000)/10 = 45,000/10 = $4,500

As per income tax depreciation = Cost * MACRS rate for year 1 = 50,000 * 20% = $10,000

Therefore, difference in year 1 will be: $10,000 - $4,500 = $5,500

Year 1

As per company book deprecation: (Equipment cost-Salvage value)/Life time = (50,000 - 5,000)/10 = 45,000/10 = $4,500

As per income tax depreciation = Cost * MACRS rate for year 2 = 50,000 * 32% = $16,000

Therefore, difference in year 1 will be: $16,000 - $4,500 = $11,500