Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pretax income of $436,000 this year. The company's financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of $76,000 and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule and Corporate tax rates are given. (attached) a. If the firm purchases the grinders before year-end, what depreciation expense will it be able to claim this year?b. If the firm reduces its reported income by the amount of the depreciation expense calculated in part a, what tax savings will result? (Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)Corporate Tax Rate ScheduleTax calculationRange of taxable income$0 to(Marginal rate x Amount over base bracket)$0)50,000)75,000)100,000)335,000)10,000,000)15,000,000)18,333,333)Base tax+$50,000$0(15%(25%(34%(39%(34%(35%(38%(35%x amount overx amount over+7,50050,000 to75,000 to100,000 to335,000 to75,000100,000335,000x amount over13,75022,250+x amount overx amount over113,9003,400,0005,150,0006,416,66710,000,000+10,000,000 to15,000,000 toOver 18,333,33315,000,000x amount over18,333,333x amount over++x amount over Rounded Depreciation Percentages by Recovery Year Using MACRS forFirst Four Property ClassesPercentage by recovery year*5 yearsRecovery year3 years7 years10 years133%20%14%10%245%32%25%18%15%19%18%14%47%12%12%12%12%9%9%5%9%8%79%7%84%6%9.6%106%114%Totals100%100%100%100%*These percentages have been rounded to the nearest whole percent to simplify calculations whileretaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actualunrounded percentages or directly apply double-declining balance (200%) depreciation using the half-yearconvention.

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Pavlovich Instruments, Inc., a maker of precision telescopes, expects to report pretax income of $436,000 this year. The company's financial manager is considering the timing of a purchase of new computerized lens grinders. The grinders will have an installed cost of $76,000 and a cost recovery period of 5 years. They will be depreciated using the MACRS schedule and Corporate tax rates are given. (attached)

a. If the firm purchases the grinders before year-end, what depreciation expense will it be able to claim this year?

b. If the firm reduces its reported income by the amount of the depreciation expense calculated in part a, what tax savings will result?

(Click on the icon located on the top-right corner of the data table below in order to copy its contents into a spreadsheet.)
Corporate Tax Rate Schedule
Tax calculation
Range of taxable income
$0 to
(Marginal rate x Amount over base bracket)
$0)
50,000)
75,000)
100,000)
335,000)
10,000,000)
15,000,000)
18,333,333)
Base tax
+
$50,000
$0
(15%
(25%
(34%
(39%
(34%
(35%
(38%
(35%
x amount over
x amount over
+
7,500
50,000 to
75,000 to
100,000 to
335,000 to
75,000
100,000
335,000
x amount over
13,750
22,250
+
x amount over
x amount over
113,900
3,400,000
5,150,000
6,416,667
10,000,000
+
10,000,000 to
15,000,000 to
Over 18,333,333
15,000,000
x amount over
18,333,333
x amount over
+
+
x amount over

Rounded Depreciation Percentages by Recovery Year Using MACRS for
First Four Property Classes
Percentage by recovery year*
5 years
Recovery year
3 years
7 years
10 years
1
33%
20%
14%
10%
2
45%
32%
25%
18%
15%
19%
18%
14%
4
7%
12%
12%
12%
12%
9%
9%
5%
9%
8%
7
9%
7%
8
4%
6%
9.
6%
10
6%
11
4%
Totals
100%
100%
100%
100%
*These percentages have been rounded to the nearest whole percent to simplify calculations while
retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual
unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year
convention.

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