A concern has a total income of $950,000 /year, and all expenses except depreciation amount to $550,000/year. At the start of the first year of the concern’s operation, a composite account of all depreciable items shows a value of $810,000, and the overall service life is estimated to be 18 years. The total salvage value at the end of the service life is estimated to be $56,000. 27% of all profits before taxes must be paid out as income taxes. What would be the reduction in income-tax charges for the first year of operation if the sum-of-the-years-digits method were used for depreciation accounting instead of the straight-line method?
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A concern has a total income of $950,000 /year, and all expenses except depreciation
amount to $550,000/year. At the start of the first year of the concern’s operation, a composite
account of all
estimated to be 18 years. The total salvage value at the end of the service life is estimated to be
$56,000. 27% of all profits before taxes must be paid out as income taxes. What would be the
reduction in income-tax charges for the first year of operation if the sum-of-the-years-digits
method were used for depreciation accounting instead of the straight-line method?
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