Final answer:
The annual difference between cash flow and depreciation for the purchase of $10,000 of office furniture, which is depreciated using the half-year convention and the 200% declining balance method, is d. $8,571.
Step-by-step explanation:
The question involves calculating the annual difference between cash flow and depreciation for tax purposes related to the purchase of office furniture. For tax purposes, furniture is depreciated using a method such as the 200% declining balance method. Since we're using the half-year convention, we would calculate half-year depreciation for the first year. This means we depreciate the office furniture at a rate of 200% divided by the useful life in years. Assuming the useful life according to IRS guidelines is typically 7 years for office furniture, we have:
- 200% divided by 7 years = approximately 28.57% per year
- Half of that for the half-year convention is approximately 14.29%.
- We apply this rate to the $10,000 cost of the furniture: 0.1429 * $10,000 = $1,429.
The cash flow impact of purchasing the furniture is $10,000 (since it was paid outright), and the depreciation for tax purposes in the first year would be $1,429. To calculate the difference:
- $10,000 (cash flow) - $1,429 (first-year depreciation) = $8,571. This represents the annual difference between the cash flow and depreciation.
Therefore, the correct answer to the student's question is d. $8,571.