FE-LIKE PROBLEM 8.1
ANSWER: b. IT MUST HAVE A BASIS GREATER THAN $1,000
FE-LIKE PROBLEM 8.2
ANSWER: c. $17,500.00
rationale: ($200,000 – $25,000) / 10 = $17,500
FE-LIKE PROBLEM 8.3
ANSWER: d. FOR MACRS-GDS AN ESTIMATE OF THE SALVAGE VALUE IS REQUIRED.
rationale: SALVAGE VALUE IS NOT INCLUDED IN MACRS DEPRECIATION
DEDUCTION CALCULATIONS
FE-LIKE PROBLEM 8.4
ANSWER: d. $80,000
rationale: $4,000 = (BASIS – 0) / 20; BASIS = $80,000
FE-LIKE PROBLEM 8.
ANSWER: b. $67,682
rationale: $4,000 = BASIS (0.0591); BASIS = $67,681.90
FE-LIKE PROBLEM 8.6
ANSWER: d. DOUBLE DECLINING BALANCE AND STRAIGHT LINE
FE-LIKE PROBLEM 8.7
ANSWER: c. $72,576
rationale: $630,000(0.1152) = $72,576
FE-LIKE PROBLEM 8.8
ANSWER: b. $9,500
rationale: $8,550 = $100,000(MACRS%); MACRS% = 0.0855, THEREFORE IT IS A
15-YEAR PROPERTY; 2ND YEAR DEDUCTION = $100,000(0.0950) = $9,500
FE-LIKE PROBLEM 8.9
ANSWER: d. $28,580.00
rationale: $200,000(0.1429) = $28,580
FE-LIKE PROBLEM 8.10
ANSWER: b. $1,728
rationale: $6,000 – ($6,000)(0.2000 + 0.3200 + 0.1920) = $1,728
FE-LIKE PROBLEM 8.11
ANSWER: a. I AND III ONLY
rationale: SALVAGE VALUE AND ANNUAL MAINTENANCE COSTS ARE NOT
INCLUDED IN MACRS DEPRECIATION DEDUCTION CALCULATIONS.
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A B
PROBLEM 8.1
a THE CURRENT $600,000 / YEAR MANUAL COST MAY ALL BE SUBTRACTED FROM INCOME FOR FINANCIAL REPORTING AND TAXABLE INCOME.
b THE $80,000 / YEAR OPERATIONAL COST MAY ALL BE SUBTRACTED FROM INCOME FOR FINANCIAL REPORTING AND TAXABLE INCOME.
THE $3.75 MILLION INVESTMENT MUST BE DEPRECIATED AND WRITTEN OFF OVER THE COURSE OF SEVERAL YEARS PER TAX LAW.
A B
PROBLEM 8.2
a CAPITAL INVESTMENT OUTFLOWS ARE NOT ALLOWED TO BE SIMPLY SUBTRACTED FOR SEVERAL REASONS:
1. U.S. TAX LAW PROHIBITS SIMPLY SUBTRACTING THE INVESTMENT ALL AT ONE TIME (WITH CERTAIN EXCEPTIONS COVERED IN CHAPTER 10).
2. AMORTIZING THE COST OF THESE ASSETS PRESENTS A REASONABLY ACCURATE REPORT FOR THE OWNERS OF THE VALUE OF THE BUSINESS.
3. AMORTIZING THE COST ALSO ALLOWS REASONABLE ESTIMES TO BE MADE OF THE COST OF DOING BUSINESS.
b DEPRECIATION CHARGES, WHILE NOT CASH FLOWS, CAN BE TREATED AS EXPENSES FOR THE PURPOSE OF FIGURING TAXABLE INCOME.
THE SPECIFIC DEPRECIATION METHOD USED CAN AFFECT THE AMOUNT OF TAXABLE INCOME AND HENCE THE TAX PAID.
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A B C D
PROBLEM 8.3
a SALES $300,000,000.00
EXPENSES $250,000,000.00
NET $50,000,000.00
NEW MILLS $14,000,000.00
FINANCIAL GAIN $36,000,000.00 LOOKING STRICTLY AT CASH FLOWS
THIS WOULD BE A FINANCIAL GAIN OF $36,000,000; HOWEVER, IT IS NOT A FAIR REPRESENTATION
OF PERFORMANCE SINCE $14M OF THE $50M IS AN INVESTMENT OVER 7 YEARS.
b SALES $300,000,000.00
EXPENSES $250,000,000.00
NET $50,000,000.00
NEW MILLS $2,000,000.00 1ST OF 7 YEAR EQUAL WRITEOFF OF $14M ASSET
FINANCIAL GAIN $48,000,000.00 AMORTIZING THE $14M INVESTMENT EQUALLY OVER 7 YEARS.
PROBLEM 8.4
a FALSE
b TRUE
c FALSE
d TRUE
THE REASON FOR INCLUDING DEPRECIATION IS TO ASSIST YOU IN PERFORMING AFTER-TAX
ANALYSES
IF USEFUL LIFE IS AS DEFINED BY THE INTERNAL REVENUE SERVICE INSOFAR AS THE
PROPERTY CLASS IS CONCERNED
DEPRECIATION IS NOT A CASH FLOW; INSOFAR AS TAXES ARE CONCERNED, DEPRECIATION IS
DEDUCTED FROM TAXABLE INCOME LIKE OTHER BUSINESS EXPENSES
OUR REASON FOR STUDYING DEPRECIATION IS BECAUSE IT AFFECTS INCOME TAXES, WHICH
ARE CASH FLOWS
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A B C D E F G H
PROBLEM 8.5
WHAT TANGIBLE INTANGIBLE PERSONAL REAL DEPRECIABLE NONDEPRECIABLE
a A CELL PHONE TOWER X X X
b A PLOT OF LAND FOR YOUR PERSONAL USE. X X X
c A COMPUTER USED IN YOUR JOB X X X
d A MOONEY VISCOMETER USED IN A POLYMERS LAB. X X X
e AN ELECTRIC GENERATOR PURCHASED BY A PUBLIC UTILITY X X X
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A B C D E F G H
PROBLEM 8.6
WHAT TANGIBLE INTANGIBLE PERSONAL REAL DEPRECIABLE NONDEPRECIABLE
a MELT INDEXER IN RESEARCH LAB X X X
b PLOT OF LAND FOR PRODUCTION OF INCOME X X X
c RESTAURANT FRANCHISE X X X
d AMATUER RADIO TOWER ATTACHED TO LAND X X X
e FENCING AND LANDSCAPE AROUND AN OFFICE COMPLEX X X X
PROBLEM 8.7
WHAT TANGIBLE INTANGIBLE PERSONAL REAL DEPRECIABLE NONDEPRECIABLE
a A TRACTOR-TRAILER RIG (18-WHEELER) X X X
b A COPYRIGHT X X X
c AN ALL-IN-ONE COPIER, SCANNER, FAX MACHINE USED IN YOUR BUSINESS. X X X
d A RENTAL HOME FOR THE PURPOSE OF GENERATING RENTAL INCOME X X X
PROBLEM 8.8
WHAT TANGIBLE INTANGIBLE PERSONAL REAL DEPRECIABLE NONDEPRECIABLE
a COMPUTER FOR PERSONAL USE X X X
b FILE CABINET IN BUSINESS OFFICE X X X
c COMMERCIAL DELIVERY TRUCK X X X
d AN OFFICE COMPLEX FOR BUSINESS X X X
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dtBtdtBt
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A B C D E F
PROBLEM 8.9
a SLN
BASIS $190,000.00
EST SALV $5,000.00 USEFUL LIFE 12
RCVD SALV $5,000.00 PERIODS 12
EOY
dtBt
0$190,000.00
1$15,416.67 $174,583.33
2$15,416.67 $159,166.67
12 $15,416.67 $5,000.00
SUM DEPR $185,000.00
bDB
BASIS $190,000.00 RATE 26.1499%
4$20,013.70 $56,667.15 $20,011.38 $56,514.39
5$14,790.13 $41,877.02 $14,778.43 $41,735.96
6$10,929.90 $30,947.12 $10,913.89 $30,822.07
7$8,077.20 $22,869.92 $8,059.93 $22,762.14
8$5,969.05 $16,900.87 $5,952.27 $16,809.88
9$4,411.13 $12,489.74 $4,395.76 $12,414.12