What is the depreciation for year three (3) using the Sum-of-Years Digits method? (4, all or nothing)

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1 Carefully read each problem before answering. Please write clearly, and show and label all formulas and/or factors used in any problem requiring mathematical calculations. 1. Based on your knowledge of the depreciation methods we have studied, answer the following questions. For each question, use an initial cost of $10,000; a depreciable salvage of $2,000; and a depreciable life of 10 years. To get credit, you must show all work (no matter how simple the math). What is the depreciation for year three (3) using the Sum-of-Years Digits method? (4, all or nothing) Using 150% Declining Balance, it was found that the depreciation values for years one (1) and two (2) were $1,500 and $1,275 respectively. Given this, what is the depreciation for year three (3) using 150% Declining Balance? (4, all or nothing) 2. The MACRS % s for the 3-year property class are as follows: 33.33, 44.45, 14.81, and Given an initial cost of $50,000 and an estimated salvage value of $7,000, determine the depreciation for year 3? Note: Book value after year 2 = $11,110. (4, all or nothing) 3. For a given year at a copper mine in Arizona, gross income was $1,500,000 and expenses were $500,000. Determine the allowable depletion for the year based on the Percent Method. The percentage depletion allowance for copper is 15%. Clearly mark the amount allowed, and show all necessary calculations (no matter how simple the math). (8) 1

2 4. Based on the knowledge we have gained on income taxes for businesses, answer the following questions. Note: Each question is independent (except the last question). That is, none of the questions (except the last) rely on information given in previous questions. Again, to get credit, you must show all work. A piece of equipment cost $100,000, had a depreciable salvage value of $10,000, a depreciable life of 5 years, and was depreciated with the Straight Line Method. After 3 years, the equipment was sold for $50,000. What is the taxable income for this situation? (5, all or nothing) BTCF = $2,000; Depletion = $250. What is the taxable income? (5, all or nothing) BTCF = $3,000; Depreciation = $400; Depletion = $300. What is the taxable income? (5, all or nothing) Gross Income = $7,500; Business Expenses = $1,000; Depreciation = $500. What is the taxable income? (5, all or nothing) Gross Income = $1,000,000; Business Expenses = $400,000; Loan Cash Flow = $11,750; Loan Interest = $10,000; Depletion = $50,000. What is the taxable income? (5, all or nothing) Given the parameters from the previous question, your answer for taxable income, and a 40% tax rate; what is the After Tax Cash Flow? (5, all or nothing) 2

3 5. You have been given the following information. Based on the information, use Benefit/Cost Analysis to determine which alternative should be chosen. Clearly identify each step (and associated choice) used to determine your solution (i.e., step 1, step 2, etc.), and state any decision(s) made. MARR = 10%. (13) Alternative X Y Z EUAB EUAC Life (yrs.) ROR 17.55% 16.67% 13.97% 6. Answer the following questions with the most appropriate response. In terms of tax consequences over the depreciable life, Sum-of-Years-Digits is a better depreciation method than Straight Line. (3) a) all of the time b) sometimes c) none of the time In terms of tax consequences, Double Declining Balance Converted to Straight Line is always a better depreciation method than Double Declining Balance. (3) a) all of the time b) sometimes c) none of the time Major oil and gas wells and standing timber are not allowed to use the percentage method for depletion. (3) True False 3

4 7. Given below is information on Exxon Mobil Corporation s stock (as of 10:09 A.M Central Standard Time on, November 11, 2009). Based on the provided information (from MSN.com), calculate the stock s dividend yield. Make sure you show how you arrived at this value. (4) 8. Bully Dawg purchased 100 shares of FSDPX (Fidelity s Select Materials Portfolio mutual fund) on March 9, 2009 for $25.40 per share. Bully sold the shares on October 14, 2009 for a price of $52.38 per share. Bully s overall income puts him in the 25% tax bracket. What type of gain is associated with Bully s buy and sell situation? Be specific. (4) Will Bully s profit on the sale of the mutual fund shares be taxed at the 25% rate or another rate? Note: For this question, assume Bully s sale did not move him into a higher tax bracket. (3) If your answer to the previous question is the 25% rate, identify what type of gain (if any) would result in a different tax rate. Note: For this question, assume Bully s sale did not move him into a higher tax bracket. (3) Does Bully s type of gain differ from the type of gain associated with the sale of a piece of equipment for a price above the depreciated book value? If so, identify what type of gain is associated with this situation. (4) 4

5 9. MACRS depreciation is based on two historical methods of depreciation. For the 7-year property class, the methods change from one to the other at year 5. Show all calculations to prove that this change occurs at year 5. Note, you do not need to show any calculations beyond year five. Again, this problem is associated with the 7-year property class. (10) Method 1 Method 2 D 1 D 2 D 3 D 4 D 5 5