Accounting Question

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satyaa

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A company purchased a new pizza oven directly from Italy for $12,676. It will work for 5 years and has no salvage value. The tax rate is 41 percent, and annual revenues are constant at $7,192. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is accelerated to 35 percent in years 1 and 2, and 30.00 percent in year 3. For purposes of this exercise ignore all expenses other than depreciation.

Because the tax rate for years 4 and 5 changed from 41 percent to 31 percent, the net income for financial reporting purposes in year 3 must be adjusted by:
A) $1,030.
B) $1,909.
C) $747.
D) $507.

Old New
Revenue $7,192 $7,192
Depreciation $2,535 $2,535
PTI $4,657 $4,657
Tax @41% $1,909 $1,444 (@31%)
NI $2,748 $3,213

Can someone correct where I am off/

Thanks
 
Whoaaa dude, I'm not even following this question. Where is this from? Can you outline your steps...f*ck I'm freaking out here.
 
This is from Schweser-Pro CD (2005 version) for SS-10. I am freaking out working on accounting for quite some time now. I just want to get done with this section.

Thanks
 
Satyaa dude, you seem to have a great understanding of accounting, and as evidenced by your questions and answers, you've got a much better grasp on things than I do.

I actually have Schweser Pro CD 2005 as well, but haven't really had time to look at it yet. I still have SS 15, 16 and 17 to get thru in the next three weeks.

Are there just general questions on Pro, or is this part of an exam on the CD? Do they not give explanations or what?

I have some major work to do...what do you recommend the best way to approach this shite is? I feel like I've forgotten a ton of my accounting/FSA material and your questions constantly have me freaking me out.

Can they really expect us to calculate the CFs of replacement project in 90 secs? I'm worried that it's gonna be totally more conceptual questions, rather than problems, like this one above - still, I have NO idea whatsoever on this question. Sorry dude.

Like I said before, keep your questions coming though, they're helping me a lot.
 
This question makes no sense, the tax rate is changing in year 5, and they want to know what kind of adjustment to make in year 3???
 
Zimzim,

Regarding the accounting questions that i post they are not from the practice exam. I have heard the practice exams (schweser) are even worse( I will try to work on them in early May). They do have the explanations but I will get a chance to look at them only after I upload the answers (being a 2005 vesrion I can do that only on my home PC not at work). Right now things have become so hectic that I am trying to solve the questions will try to upload them the day I don't feel like opening the book.

The way I am trying to work with accounting (atleast) is to try to practice all the questions in Schweser-Pro cd. This is what i can recommed you.

Thanks for your response
 
Also, it says depreciation is "accelerated" to 35% for tax purposes, but isn't SL depreciation 100%? So anything lower than 100% would be "deccelerated" not accelerated right? Why would any company want to depreciate at less than SL for TAX purposes?
 
Dermot,

I had no clue about this question (not having an accounting background). It does effect deferred tax asset and liability but i have no idea about the income impact.

Unless the question is wrong (which I doubt) I have no clue?????
 
SL depreciation would be (asset price-salvage value)/depreciable life. In this case it is 5-yrs for SL depreciation and 3-yrs for tax purpose at 35% for first two years and 30% for year-3.
 
Thanks bro...I need to get cracking, as I know this is my most challenging section.

Hopefully the 3-day seminar in Edmonton that I'm taking at the end of the month should quell my fears a bit, helping me work through these bastardo questions. Once I get back to looking at FSA, hopefully I can be a bit more of a presence on here in answering/contributing to your questions. Cheers,

C
 
This is a tricky question and I'm not sure how it can be done without a spreadsheet. Essentially, the question is asking for the difference between the Tax Liability at the end of year 3 if the tax rate drops by 10%. If you draw out the revenue and expenses (dep only in this case), you get the following for tax (t) and reporting (rep) purposes:

(t) 1 2 3 4 5

Revenue 7192 7192 7192 7192 7192
Dep (t) 2535 2535 2535 2535 2535
EBIT 4657 4657 4657 4657 4657
t 1909 1909 1909 1444 1444
NI 2748 2748 2748 3213 3213

(rep)
Revenue 7192 7192 7192 7192 7192
Dep (rpt) 4437 4437 3803 0 0
EBIT 2755 2755 3389 7192 7192
t 1130 1130 1390 2230 2230
NI 1626 1626 2000 4962 4962


Def t(L)
780 780 520 -786 -786
 
This is a tricky question and extremely difficult without a spreadsheet. Essentially, the question is asking for the difference between the Tax Liability at the end of year 3 if the tax rate drops by 10%. If you draw out the revenue and expenses (depreciation only in this case), you get the following income for tax (t) and reporting (rep) purposes:

1 2 3 4 5
(t)
Revenue 7192 7192 7192 7192 7192
Dep (t) 2535 2535 2535 2535 2535
EBIT 4657 4657 4657 4657 4657
t 1909 1909 1909 1444 1444
NI 2748 2748 2748 3213 3213

(rep)
Revenue 7192 7192 7192 7192 7192
Dep (rpt) 4437 4437 3803 0 0
EBIT 2755 2755 3389 7192 7192
t 1130 1130 1390 2230 2230
NI 1626 1626 2000 4962 4962

Def t (L) - Tax(t) - Tax(rep):
780 780 520 -786 -786

Sum of Def t (L) = 507 ---> Amount of Adjustment

Notice that because the tax % changed for 2004 and 2005, the straight line method results in more overall tax.

Also, I beleive the short-hand method would be to find the variance between each deprecitation method for the initial tax period (years 1-3) and multiply it by the tax change. This gives you: 12676(100%) - 12676(60%) * (.41-.31) = 507

I havent seen anything in the notes or texts regarding this short method but it seems to make sense. Of course, i could be completely wrong about this entire problem; wouldnt be the first time.
 
I just took the total tax for reporting considering the tax change

1) 1909.37
2) 1909.37
3) 1909.37
4) 1443.67 (adjusted for change in tax)
5) 1443.67 (adjusted for change in tax)
----------------
8,615.45

For Taxes

1) 1129.71
2) 1129.71
3) 1389.57
4) 2229.52 (adjusted)
5) 2229.52 (adjusted)
-----------------
8,108.03

8,615-8108 = 507 adjustment because the tax liability decreased due to the decrease in tax rate...is this the correct reasoning?
 
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