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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%?

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
You will get 6,000
Account for the TAX
6000 x .7 (assuming 30% tax rate)
Inaganti6 @johntan, you the man.
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I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!


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.