Please solve a-e Answers: a) 138,991, b) 149,123, c) 174,920, d) 149,453 11-32 L
ID: 2786672 • Letter: P
Question
Please solve a-e
Answers: a) 138,991, b) 149,123, c) 174,920, d) 149,453
11-32 Loretta Livermore Labs purchased R costing $200,000. The interest rate is s value is $20,000, and expected life is 10 R&D; equipmen 5%, salvage of the depreciation deduction assuming: (a) Straight-line depreciation (b) Sum-of-years'-digits depreciation (c) MACRS depreciation (d) Double declining balance depreciation (e) Which method is preferred for determining the firm's taxes? () Which method is preferred for determining the firm's value? (3) Is using two accounting methods ethical?Explanation / Answer
Answer to section a)
Straight Line Depreciation = (Cost of Asset - Residual/Salvage Value)/Estimated Useful Life
Depreciation Amount per year will be = (200,000 - 20,000)/10 = $18,000
Discounting them for each year with discount rate as 5% would be
Year 10 = 18,000/(1.05)^10 = 11050.43856
Year 9 = 18,000/(1.05)^9 = 11602.96049
Year 8 = 18,000/(1.05)^8 = 12183.10852
Year 7 = 18,000/(1.05)^7 = 12792.26394
Year 6 = 18,000/(1.05)^6 = 13431.87714
Year 5 = 18,000/(1.05)^5 = 14103.471
Year 4 = 18,000/(1.05)^4 = 14808.64455
Year 3 = 18,000/(1.05)^3 = 15549.07677
Year 2 = 18,000/(1.05)^2 = 16326.53061
Year 1 = 18,000/(1.05)^1 = 17142.85714
Total = $138,991
Answer to Section d)
In double depreciation method rate of decline is 2 times that of straight line method and salvage value is not subtracted for determining depreciation value. Book value is used (Cost - Depreciation) to calculate depreciation.
Cost of asset = $200,000
Estimated residual value = $20,000
Estimated useful life of asset = 10 years
Depreciation rate = (1/useful life) x 200%
= 1/10 x 200% = 20% x 2 = 40%
Year 1= 76,190.48
Year 2 = 45,714.29
Year 3 = 27,428.57
Year 4 = 16,457.14
Year 5 = 9,874.29
Year Cost Depreciation Rate Depreciation Book Value
1 $200,000 40% $80,000 $120,000
2 $120,000 40% $48,000 $72,000
3 $72,000 40% $28,800 $43,200
4 $43,200 40% $17,280 $25,920
5 $25,920 40% $10,368 $15,552
Using 5% discount rate, the above values will be obtained.