Question

Paula's Pastries expanded its facilities by building an addition to make room for a larger kitchen. The original building was constructed 12 years earlier and is being depreciated using a 39-year recovery period. The cost of the new addition will be depreciated over_years.

Answer 1

The cost of the new kitchen addition for Paula's Pastries will likely be depreciated over a 39-year period, the same as the original building, which aligns with standard practices for non-residential real property.

Step-by-step explanation:

The cost of the new addition to Paula's Pastries would typically be depreciated over the same recovery period used for the original building unless there is a specific business or tax reason to use a different one. Since the original building is being depreciated using a 39-year recovery period, it would be logical to assume that the new addition will also be depreciated over a 39-year period, consistent with U.S. Internal Revenue Service guidelines for non-residential real property.

However, it's important for a business to consult with financial advisors or tax professionals to determine the most advantageous depreciation period for the new construction, taking into account any recent changes in the tax law and the specific characteristics of the addition.

When a firm, like Paula's Pastries, expands, it is an indicator of business investment, which is one of the key components for sustaining economic growth. Decisions concerning depreciation, expansions, and investments are crucial for a company's financial planning and can have significant tax implications.

Answer 2

The new addition at Paula's Pastries will be depreciated over a 39-year recovery period, which is in accordance with MACRS guidelines for non-residential real property. Investment decisions, including those about expansions, are often influenced by the payback period concept, evaluating whether potential revenue or savings justify the cost over time.

Step-by-step explanation:

The cost of the new addition to Paula's Pastries, which is to expand the kitchen facilities, will be depreciated over the same 39-year recovery period as the original building. The 39-year recovery period is standard for non-residential real property under the Modified Accelerated Cost Recovery System (MACRS) used in the United States for tax depreciation. Since the new addition is a permanent improvement to the business premises, it will also be classed as real property and follow the same depreciation timeframe.

Normally, businesses look at the payback period when making decisions about investments such as Paula's Pastries' expansion, which is the time it takes for an investment to generate enough savings or revenue to cover the initial cost. In this case, Paula's investment in the new kitchen addition would be evaluated based on its potential to enhance productivity and increase revenues, thereby justifying the expenditure over the long-term 39-year depreciation schedule.