Abbott placed into service a flexible manufacturing cell costing $850,000 early this year for production of their analytical testing equipment. Gross income due to the cell is expected to be $750,000 with deductible expenses of $475,000. Depreciation is based on MACRS-GDS and the cell is in the 7-year property class calling for a depreciation percentage of 14.29% or $121,465 in the first year. Half of the cell cost is financed at 11% with principal paid back in equal amounts over 5 years. The first year’s interest is therefore $46,750 while the principal payment is $85,000. Solve, a. Determine the taxable income for the first year. b. Determine the tax paid due to the cell during the first year using a 25% income-tax rate. c. Determine the after-tax cash flow for the first year.
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.
Abbott placed into service a flexible
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