Question

Question: In April of the current year, Blue Corporation purchased an asset to be used in its man... Question: In April of the current year, Blue Corporation purchased an asset to be used in its manufacturing... In April of the current year, Blue Corporation purchased an asset to be used in its manufacturing operations for $100,000. Blue's management expects the asset to ratably provide valuable services in the production for eight years and have a salvage value of $12,000. The asset is a five year asset for tax purposes. Blue has adopted the half-year convention for book purposes in the year of acquisition and disposition; Blue uses MACRS for tax purposes. a. Compute the depreciation expense in the year of acquisition for book and tax purposes. b. Identify the book-tax difference related to the depreciation expense in the year of acquisition.

Answer 1

a) For book purposes, the depreciation will be calculated on the amount of cost less salvage value and divided this amount by uselife of asset (i.e. 8 years).

Depreciation expense for book purposes (half year convention) = [(Cost - Salvage Value)/Useful life]*1/2

= [($100,000 - $12,000)/8 years]*1/2 = ($88,000/8 yrs)*1/2

= $11,000*1/2 = $5,500

Depreciation expense for tax purposes (2017) = Cost Basis of Asset*MACRS rate for five year asset

= $100,000*20% = $20,000

(It is assumed that current year is 2017 and MACRS rates for year 2017 is taken for calculating depreciation expense for tax purposes).

b) Book tax difference related to dep. exp. in the year of expense

= Depreciation as per tax purposes - Depreciation as per book purposes

= $20,000 - $5,500 = $14,500