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Basic Question 1 of 19
Taylor Corporation purchased a new asset for $80,000. The asset had an estimated life of 5 years and an estimated salvage value of $20,000. Now suppose that instead of using a life of five years, the company used an estimated life of ten years and a salvage value of $20,000. What is the effect on income in the second year, assuming straight-line method and a tax rate of 30%?
B. $6,000
C. $4,200
A. $12,000
B. $6,000
C. $4,200
User Contributed Comments 14
| User | Comment |
|---|---|
| mabrickley | Can anyone explain how they came up with income before taxes would 6k, where is the 12K-6K coming from |
| yusu | (a) Depreceiation cost (Useful life 5yrs) = (80,000-20,000)/5 = 12,000 (b) Dept Cost (useful life 10yrs) = (80000-20000)/10 = 6,000 (c) diff between a and b is 6K. |
| AusPhD | Can anyone explain why tax is included here? Wouldn't they use the MACRS method for tax? |
| thud | The question is asking for the effect on Net Income. |
| bahodir | AusPhD, pay attention to "assuming straight-line method". Just an example, I guess. |
| uberstyle | MACRS applies to actual tax filings and payment of tax (cashflows), but not to calculation of net income |
| jainrajeshv | This is change in accounting estimate and must have prospective effect only. So in the second year depriciation (Net of tax) should be $4200 i.e ((80000-20000)/10)*.7 Am i wrong anywhere? |
| Querdenker | How do we take into account that we have already written off 12K in the first year? The sum of all depreciation over time should be 60K, so writing off 12K + 9* 6K gives a total of 66K (rather than 60K). |
| in4maha | Any body know how to do it the Calculator (TI BA II plus) |
| thomama | Querdenker, the depreciation schedule didn't change, i.e., management decided to extend the life of the asset from the beginning. So, the 10 year life is for the entire period. It's SLD, so each year is simply 6K depreciation. |
| johntan1979 | When it just says "income", always assume they are asking for (after tax) net income. |
| jonan203 | HP12: $80,000 <enter> $20,000 <minus> 5 <divide><enter><enter> $80,000 <enter> $20,000 <minus> 10 <divide><minus> .70 <times> |
| Yrazzaq88 | On the TI Plus Calculator: [2nd] DEPR Make sure you set to SL LIF = 10 CST = 80,000 SAL = 20,000 [CPT] DEP You will get 6,000 Account for the TAX 6000 x .7 (assuming 30% tax rate) =$4200 |
| Inaganti6 | @johntan, you the man. |
I just wanted to share the good news that I passed CFA Level I!!! Thank you for your help - I think the online question bank helped cut the clutter and made a positive difference.
Edward Liu
Learning Outcome Statements
analyze and interpret financial statement disclosures regarding property, plant, and equipment and intangible assets
CFA® 2024 Level I Curriculum, Volume 2, Module 7.