FINANCIAL ACCOUNTING 9TH
16th Edition
ISBN: 9781308821672
Author: Libby
Publisher: MCG/CREATE
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Chapter S, Problem 5E
Calculating a
LOS-5 On January 1, 2013, Berkshire Hathaway purchased a piece of equipment for $90,000. The following table reflects how Berkshire is
| TAX | |||
| Fiscal Year Ending |
Depreciation Expense |
Accumulated Depreciation |
Book Value |
| 90,000 | |||
| 2013 | 30,000 | 30,000 | 60,000 |
| 2014 | 40,005 | 70,005 | 19,995 |
| 2015 | 19,995 | 90,000 | 0 |
| TAX | |||
| Fiscal Year Ending | Depreciation Expense | Accumulated Depreciation | Book Value |
| 90,000 | |||
| 2013 | 30,000 | 30,000 | 60,000 |
| 2014 | 40,005 | 70,005 | 19,995 |
| 2015 | 19,995 | 90,000 | 0 |
Use the information above to fill in the deferred tax liability column below:
| FINANCIAL REPORTING | ||||
| Fiscal Year Ending |
Taxable | Tax | Deferred Tax | |
| Revenue | Income | Expense | Liability | |
| 2013 | 200,000 | 170,000 | 59,500 | |
| 2014 | 200,000 | 170,000 | 59,500 | |
| 2015 | 200,000 | 170,000 | 59,500 | |
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Depreciation as a Tax Shield
The term tax shield refers to the amount of income tax saved by deducting depreciation for income tax purposes. Assume that Supreme Company is considering the purchase of an asset as of January 1, 2017. The cost of the asset with a five-year life and zero residual value is $123,300. The company will use the straight-line method of depreciation.
Supreme's income for tax purposes before recording depreciation on the asset will be $46,900 per year for the next five years. The corporation is currently in the 30% tax bracket.
Required:
Calculate the amount of income tax that Supreme must pay each year if the asset is and is not purchased.
1. Amount of taxes paid if asset is not purchased is:
$fill in the blank 1
2a. Amount of depreciation if asset is purchased is:
$fill in the blank 2
b. Amount of taxes paid if asset is purchased is:
$fill in the blank 3
3. What is the amount of the depreciation tax shield?
$fill in the blank 4
Depreciation as a Tax Shield
The term tax shield refers to the amount of income tax saved by deducting depreciation for income tax purposes. Assume that Supreme Company is considering the purchase of an asset as of January 1, 2017. The cost of the asset with a five-year life and zero residual value is $143,800. The company will use the straight-line method of depreciation.
Supreme's income for tax purposes before recording depreciation on the asset will be $48,400 per year for the next five years. The corporation is currently in the 25% tax bracket.
Required:
Calculate the amount of income tax that Supreme must pay each year if the asset is and is not purchased.
1. Amount of taxes paid if asset is not purchased is:
$
2a. Amount of depreciation if asset is purchased is:
$
b. Amount of taxes paid if asset is purchased is:
$
3. What is the amount of the depreciation tax shield?
$
Deferred Tax Calculations (Appendix)
Wyhowski Inc. reported income from operations, before taxes, for 2015-2017 as follows:
2015
$433,000
2016
495,000
2017
580,000
When calculating income, Wyhowski deducted depreciation on plant equipment. The equipment was purchased January 1, 2015, at a cost of $180,000. The equipment is expected to last three years and have a(n) $15,000 salvage value. Wyhowski uses straight-line depreciation for book purposes. For tax purposes, depreciation on the equipment is $103,000 in 2015, $41,000 in 2016, and $21,000 in 2017. Wyhowski's tax rate is 35%.
. What is the balance in the Deferred Income Tax account at the end of 2015, 2016, and 2017? If your answer is zero, enter "0". If required, round all calculations to the nearest dollar.
Year
Balance
Debit or Credit
2015
$fill in the blank 7
2016
$fill in the blank 9
2017
$fill in the blank 11
Chapter S Solutions
FINANCIAL ACCOUNTING 9TH
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