Shimei Inc. purchased computer equipment on March 1, 2014, for $31,000. The computer equipment has a useful life of 10 years and a salvage value of $1,000. For tax purposes, the MACRS class life is 5 years. a. Assuming that the company uses the straight-line method for book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 2014 and (2) the tax return for 2014? b. Assuming that the company uses the double-declining-balance method for both book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 2014 and (2) the tax return for 2014? c. Why is depreciation for tax purposes different from depreciation for book purposes even if the company uses the same depreciation method to compute them both?
mputer equipment on March 1, 2014, for $31,000
equipment has a useful life of 10 years
salvage value of $1,000
For tax purposes, the MACRS class life is 5 years.
Depriciation as per stright line method will be as follow
Depreciation for 2014= ($31,000 – $1,000) x 1/10 x 10/12 = $2,500
Depriciation as MACRS class life is 5 years method will be as follow
| Depreciation in 1st Year = | ||
| Cost × | 1 | × A × Depreciation Convention |
| Useful Life | ||
Depriciation as per MARCS method for the first year will be 20 % for the year
So for 10 months depriciation will be as follow
=31,000*20%
=6200
depreciation expense reported in (1) the financial statements for 2014 =2,500
depreciation expense reported in (2) the tax return for 2014 =6,200
. Assuming that the company uses the double-declining-balance method for both book and tax purposes, what is the depreciation expense reported in (1) the financial statements for 2014 and (2) the tax return for 2014
As we have allready calculate the straight-line depreciation rate. For book purpose asset has 10 years useful life, the straight-line depreciation rate equals (100% / 10) or 10% per year. With double-declining-balance, double that rate to arrive at 20%.
=31,000 x 20% x10/12
=5,167
For Tax purpose
the asset has 5 years useful life, the straight-line depreciation rate equals (100% / 5) or 20% per year. With double-declining-balance, double that rate to arrive at 40%. Apply the rate to the book value of the asset
=31000 x 40% x10/12
=10,333
Why is depreciation for tax purposes different from depreciation for book purposes even if the company uses the same depreciation method to compute them both
Answer = depreciation for tax purposes different from depreciation for book purposes because in both the method we assume diffrent life . for the tax purpose we have consider life of 5 years while for book purpose we have considered life of 10 years that is why differece appear
