4150/5150 ORIE Homework #6 Due March 9, 2012 Please keep a copy of this homework as it will not be graded and returned to you prior to the prelim. 1. Wicks Company purchased an asset on July 4, 2007 and immediately put it into service. The asset was in the mid-quarter 5-year MACRS asset class. The asset cost $100,000 including installation. Show the journal entry needed to record the sale of the asset for $10,000 cash on February 10, 2012. There was no section 179 or bonus depreciation associated with the asset. This asset was acquired in the third quarter, so the 3rd quarter mid-quarter 5-year MACRS table is used.
Year 2007 2008 2009 2010 2011 2012
Table 0.15 0.34 0.204 0.1224 0.113 0.0706
Early
0.2 Total
Amt 0.15 0.34 0.204 0.1224 0.113 0.01412
Deprec 15000 34000 20400 12240 11300 1412 94352
Update depreciation 2/10/2012 Deprec. Exp Acc Dep Record the sale 2/10/2012 Cash Acc Dep Equip Gain on Sale 10,000 94,352 100,000 4,352 1412 1412
Since the asset is sold in the first quarter, only one-fifth of the table value is recorded as depreciation in 2012. Not many students remembered to update the depreciation like we always did in class, I think it is a good idea to remember to do that.
2. Leslie Manufacturing purchased a warehouse building on September 2, 2004, and immediately put it into service. The total cost was $1,200,000, of which $100,000 was assigned to the land upon which the warehouse was situated. The warehouse (and the land) was sold to Breitner Inc. on December 10, 2011 for $950,000. Show the journal entry to record the sale. There was no section 179 or bonus depreciation associated with the asset We use the MACRS percentages for Nonresidential Real Property
Amount 1,100,000
Year 2004 2005 2006 2007 2009 2008 2010 2011
9th month Deprec 0.7479 2.5641 2.5641 2.5641 2.5641 2.5641 2.5641 2.4572625 Acc Dep
Deprec 8,226.90 28,205.10 28,205.10 28,205.10 28,205.10 28,205.10 28,205.10 27,029.89 204,487.39
Update 12/10/2011 Deprec. Exp. Acc. Dep. Record the sale 12/10/2011 Cash Acc Dep Loss on sale Warehouse 950,000 204,487.39 45,512.61 1,200,000 27,029.89 27,029.89
Using the mid-month convention, only 23/24th of the table value is used in the year of disposal since it is disposed of in mid-December, 23.24th of the way through the year. 3. SuperToons Inc. purchased a new machine for $350,000 on July 2, 2012. The asset qualified for bonus depreciation and for Section 179 depreciation, and was a mid-year 7-year MACRS asset class asset. Find the total depreciation expense charged to the asset in 2012. 50% bonus: Section 179: MY 7 Yr Total $175,000 $125,000 $ 7,145 $307,145
4. Modigliani Jet Ski Company has purchased a machine for a total of $150,000. It is classed as mid-year five-year property. There was no section 179 or bonus depreciation associated with the asset. If their marginal tax rate is 35%, discounted at 8%, what is the present value of the depreciation tax shield? They save money on taxes due to the depreciation expense on this asset.
Invest 150000 Deprec 0.2 0.32 0.192 0.1152 0.1152 0.0576 Deprec 30000 48000 28800 17280 17280 8640 NPW @ 8% Tax Decrease 10500 16800 10080 6048 6048 3024 $42,594.60
0 1 2 3 4 5 6
From the textbook:
7-61 d2 = $150,000(0.4445) = $66,675
Select (b)
7-62 BV2 = $150,000(1 0.3333 0.4445) = $33,330, select (d) 7-63 d3 = $150,000(0.1481)(0.5) = $11,108, select (d) 7-75 dA*= $12,000 (0.1429 + 0.2449 + 0.1749 + 0.1249) = $8,251.20 BV4 = $12,000 - $8,251.20 = $3,748.80 Select (a)