Newton Company is considering the purchase of an asset that will provide a depreclation tax shleld of $10,000 per year for 10 years. Assuming the company is subject to a 40% tax rate during the perlod and a zero salvage value, what is the depreciable cost of the asser? Multiple Choice $100,000 $250,000 $400,000 Can't be determined from the information provided

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
icon
Related questions
Question
**Question:**

Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $10,000 per year for 10 years. Assuming the company is subject to a 40% tax rate during the period and a zero salvage value, what is the depreciable cost of the new asset?

**Multiple Choice:**

- ○ $100,000 
- ○ $250,000 
- ● $400,000 
- ○ Can't be determined from the information provided

**Explanation:**

The problem involves calculating the depreciable cost of an asset to achieve a specified tax shield. Given the depreciation tax shield of $10,000 per year and a 40% tax rate, one can use the formula for the tax shield: 

\[ \text{Tax Shield} = \text{Depreciation} \times \text{Tax Rate} \]

Here, rearranging the formula for depreciation gives:

\[ \text{Depreciation} = \frac{\text{Tax Shield}}{\text{Tax Rate}} \]

Inserting the given values:

\[ \text{Depreciation} = \frac{10,000}{0.40} = 25,000 \]

To find the depreciable cost over 10 years:

\[ \text{Depreciable Cost} = \text{Depreciation} \times \text{Years} = 25,000 \times 10 = 250,000 \]

There may be a confusion with the options; however, based on calculations, $250,000 appears correct unless other factors are considered in the multiple-choice options. It's also possible that an error occurred in setting the options if $400,000 is marked.
Transcribed Image Text:**Question:** Newton Company is considering the purchase of an asset that will provide a depreciation tax shield of $10,000 per year for 10 years. Assuming the company is subject to a 40% tax rate during the period and a zero salvage value, what is the depreciable cost of the new asset? **Multiple Choice:** - ○ $100,000 - ○ $250,000 - ● $400,000 - ○ Can't be determined from the information provided **Explanation:** The problem involves calculating the depreciable cost of an asset to achieve a specified tax shield. Given the depreciation tax shield of $10,000 per year and a 40% tax rate, one can use the formula for the tax shield: \[ \text{Tax Shield} = \text{Depreciation} \times \text{Tax Rate} \] Here, rearranging the formula for depreciation gives: \[ \text{Depreciation} = \frac{\text{Tax Shield}}{\text{Tax Rate}} \] Inserting the given values: \[ \text{Depreciation} = \frac{10,000}{0.40} = 25,000 \] To find the depreciable cost over 10 years: \[ \text{Depreciable Cost} = \text{Depreciation} \times \text{Years} = 25,000 \times 10 = 250,000 \] There may be a confusion with the options; however, based on calculations, $250,000 appears correct unless other factors are considered in the multiple-choice options. It's also possible that an error occurred in setting the options if $400,000 is marked.
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 2 steps

Blurred answer
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
Accounting
ISBN:
9781259964947
Author:
Libby
Publisher:
MCG
Accounting
Accounting
Accounting
ISBN:
9781337272094
Author:
WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.
Publisher:
Cengage Learning,
Accounting Information Systems
Accounting Information Systems
Accounting
ISBN:
9781337619202
Author:
Hall, James A.
Publisher:
Cengage Learning,
Horngren's Cost Accounting: A Managerial Emphasis…
Horngren's Cost Accounting: A Managerial Emphasis…
Accounting
ISBN:
9780134475585
Author:
Srikant M. Datar, Madhav V. Rajan
Publisher:
PEARSON
Intermediate Accounting
Intermediate Accounting
Accounting
ISBN:
9781259722660
Author:
J. David Spiceland, Mark W. Nelson, Wayne M Thomas
Publisher:
McGraw-Hill Education
Financial and Managerial Accounting
Financial and Managerial Accounting
Accounting
ISBN:
9781259726705
Author:
John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting Principles
Publisher:
McGraw-Hill Education