Question

Infinity Production acquired a new machine at the beginning of the current year. The machine cost $ 900 comma 000 with no residual value expected. Infinity uses the straight-line method for financial​ reporting, assuming a 6minusyear useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages.

Year MACRS(%)
1 20.00
2 32.00
3 19.20
4 11.52
5 11.52
6 5.76

The company is subject to a 40% income tax rate and has no other book-tax differences. Income before depreciation and tax is presented below:

Year Income before Tax and Depreciation
1 $400,000
2 450,000
3 520,000
4 700,000
5 820,000
6 950,000

Required:
What is Infinity's taxable income for year 1?

a) $220,000 b) $245,000 c) $400,000 d) $250,000

Answer 1

Option A is correct $220,000

Hence Infinity's taxable income for year 1 will be $220,000.

Step-by-step explanation:

Income before tax and depreciation for year 1

= $400,000

Depreciation allowed as per income tax for year 1

= $900,000*20%

= $180,000

Taxable income for year 1

= $400,000 - $180,000

= $220,000