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Chapter 9: 10RQ (page 488)

What is the depreciation method that is used for tax accounting purposes? How is it different than the methods that are required by GAAP to be used for financial accounting purposes?

Short Answer

Expert verified

The method used for tax accounting is the Modified Accelerated Cost recovery system, it is different from the depreciation methods of GAAP as in this method businesses cannot decide the useful life of assets

Step by step solution

01

Method used in tax accounting

The method that is required by Internal Revenue Service (IRS) to be used for tax accounting is the Modified Accelerated Cost Recovery System (MACRS).

02

Difference between MACRS and other depreciation methods required GAAP

The major difference between MACRS and depreciation methods required by the GAAP is that in MACRS, the businesses do not get to choose the useful life of the asset, rather Internal revenue service specifies the useful life based on the specific classes.

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Most popular questions from this chapter

Accounting for intangibles

Midland States Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Midland States Telecom purchased goodwill as part of the acquisition of Sheldon Wireless Enterprises, which had the following figures:

Book value of assets \( 900,000

Market value of assets 1,400,000

Market value of liabilities 530,000

Requirements

1. Journalize the entry to record Midland States Telecom鈥檚 purchase of Sheldon Wireless for \)440,000 cash plus a $660,000 note payable.

2. What special asset does Midland States Telecom鈥檚 acquisition of Sheldon Wireless identify? How should Midland States Telecom account for this asset after acquiring Sheldon Wireless? Explain in detail.

Computing depreciation鈥攖hree methods Crispy Fried Chicken bought equipment on January 2, 2018, for \(33,000. The equipment was expected to remain in service for four years and to operate for 6,750 hours. At the end of the equipment鈥檚 useful life, Crispy鈥檚 estimates that its residual value will be \)6,000. The equipment operated for 675 hours the first year, 2,025 hours the second year, 2,700 hours the third year, and 1,350 hours the fourth year.

Requirements

1. Prepare a schedule of depreciation expense, accumulated depreciation, and book value per year for the equipment under the three depreciation methods: straight-line, unit鈥檚 of-production, and double-declining-balance. Show your computations. Note: Three depreciation schedules must be prepared.

2. Which method tracks the wear and tear on the equipment most closely?

What does it mean if an exchange of plant assets has commercial substance? Are gains and losses recorded on the books because of the exchange?

Question: Determining asset cost, preparing depreciation schedules (3 methods), and identifying depreciation results that meet management objectives

On January 3, 2018, Speedy Delivery Service purchased a truck at a cost of \(67,000. Before placing the truck in service, Speedy spent \)3,000 painting it, \(1,200 replacing tires, and \)3,500 overhauling the engine. The truck should remain in service for five years and have a residual value of $5,100. The truck鈥檚 annual mileage is expected to be 20,000 miles in each of the first four years and 12,800 miles in the fifth year鈥�92,800 miles in total. In deciding which depreciation method to use, Alec Rivera, the general manager, requests a depreciation schedule for each of the depreciation methods (straight-line, units-of-production, and double-declining-balance).

Requirements

1. Prepare a depreciation schedule for each depreciation method, showing asset cost, depreciation expense, accumulated depreciation, and asset book value.

2. Speedy prepares financial statements using the depreciation method that reports the highest net income in the early years of asset use. Consider the first year that Speedy uses the truck. Identify the depreciation method that meets the company鈥檚 objectives.

Recording partial-year depreciation and sale of an asset On January 2, 2017, Comfy Clothing Consignments purchased showroom fixtures for \(17,000 cash, expecting the fixtures to remain in service for five years. Comfy has depreciated the fixtures on a double-declining-balance basis, with zero residual value. On October 31, 2018, Comfy sold the fixtures for \)7,600 cash. Record both depreciation expense for 2018 and sale of the fixtures on October 31, 2018.
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