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Plastic Recycling Company is just starting operations with new equipment costing $30,000 and a useful life of five years. At the end of five years the equipment probably can be sold for $5,000. The company is concerned with its cash flow and wants a comparison of straight-line and MACRS1 depreciation to help management decide which depreciation method to use for financial statements and for its income tax return. Assume a 40 percent tax rate.

Modified Accelerated Cost Recovery System (effective for assets placed in use after December 31, 1986.)

Required:

a. Calculate the difference in taxable income and cash inflow under each method. Assume MACRS allowances are 20, 32, 18, 15, and 15 percent for years 1-5 respectively.

b. Which deprecation method is preferable for tax purposes? Why?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9430893

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