Question

Question 9

Vaughn Enterprises purchased a delivery truck on January 1, 2020, at a cost of $30,000. The truck has a useful life of 7 years with an estimated salvage value of $5,080. The straight-line method is used for book purposes. For tax purposes, the truck, having an MACRS class life of 7 years, is classified as 5-year property; the optional MACRS tax rate tables are used to compute depreciation. In addition, assume that for 2020 and 2021 the company has revenues of $222,000 and operating expenses (excluding depreciation) of $144,300.

MACRS Depreciation Rates by Class of Property
Recovery Year		3-year   (200% DB)		5-year (200% DB)		7-year (200% DB)		10-year (200% DB)		15-year (150% DB)		20-year (150% DB)
1		33.33		20.00		14.29		10.00		5.00		3.750
2		44.45		32.00		24.29		18.00		9.50		7.219
3		14.81*		19.20		17.49		14.40		8.55		6.677
4		7.41		11.52*		12.49		11.52		7.70		6.177
5				11.52		8.93*		9.22		6.93		5.713
6				5.76		8.92		7.37		6.23		5.285
7						8.93		6.55*		5.90*		4.888
8						4.46		6.55		5.90		4.522
9								6.56		5.91		4.462*
10								6.55		5.90		4.461
11								3.28		5.91		4.462
12										5.90		4.461
13										5.91		4.462
14										5.90		4.461
15										5.91		4.462
16										2.95		4.461
17												4.462
18												4.461
19												4.462
20												4.461
21												2.231
	*Switchover to straight-line depreciation.

(a)

	Your answer is correct.

Compute book income before income taxes for 2020 and 2021.

		2020		2021
Income before income taxes		$enter a dollar amount		$enter a dollar amount

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Attempts: 1 of 3 used

(b)

Compute taxable income for 2020 and 2021. (Round answers to 0 decimal places, e.g. 45,892.)

Taxable income for 2020		$enter taxable income for 2017 in dollars rounded to 0 decimal places
Taxable income for 2021		$enter taxable income for 2018 in dollars rounded to 0 decimal places

Answer 1

(a) Computation of Income before Income Tax

Particulars	2020	2021
Revenues	222,000	222,000
Less: Operating expense	(144,300)	(144,300)
Less: Depreciation	(3,560)	(3,560)
Income before Income Tax	74,140	74,140

(b) Computation of Taxable Income

Particulars	2020	2021
Revenues	222,000	222,000
Less: Operating expense	(144,300)	(144,300)
Less: Depreciation for tax purpose	(6,000)	(7,680)
Taxable Income	71,700	70,020

Working:

Computation of total depreciation over useful life of the truck

For book purpose = (30,000 - 5,080)/7= 3,560 for 1 year

Total depreciation = 3,560*7= 24,920

For tax purpose:

For Year 1: 30,000* 20% = 6,000

Year 2: 24,000*32% = 7,680

Year 3: 16,320*19.20% = 3,133

Year 4: 13,187*11.52% = 1,519

Year 5: 11,668*11.52% = 1,344

Year 6: 10,324*5.76% = 595

Total depreciation = 20,271