ATC 8-9 Spreadsheet Assignment: Reporting to the IRS versus Financial Statement Reporting

Crist Company operates a lawn-mowing service. Crist has chosen to depreciate its equipment for financial statement purposes using the straight-line method. However, to save cash in the short run, Crist has elected to use the MACRS method for income tax reporting purposes.

Required

a. Set up the following spreadsheet to reflect the two different methods of reporting. Notice that the first two years of revenues and operating expenses are provided.

b. Enter the effects of the following items for Year 1:

1. At the beginning of Year 1, Crist purchased for $10,000 cash a lawn mower it expects to use for five years. Salvage value is estimated to be $2,000. As stated, Crist uses the straight-line method of depreciation for financial statement purposes, and the MACRS method for income tax purposes. Use formulas to calculate the depreciation expense for each method.
2. No equipment was sold during Year 1; therefore, no gain or loss would be reported this year.
3. The income tax rate is 30 percent. For simplicity, assume that the income tax payable was paid in Year 1.
4. Complete the schedules for income reporting, reporting of equipment, and reporting of cash flows for Year 1. Use formulas for all calculations.

c. Enter the effects of the following items for Year 2:

1. Crist used the mower for the entire Year 2. Enter Year 2 depreciation expense amounts for the income reporting section of your spreadsheet.
2. At December 31, Crist sold the lawn mower for $7,000. Calculate the gain or loss on the sale for the income reporting section. Use formulas to make the calculations.
3. The income tax rate is 30 percent. For simplicity, assume that the income tax payable was paid in Year 2.
4. Complete the schedules for income reporting and reporting of cash flows for Year 2.

d. Calculate the Total columns for the income reporting and reporting of cash flows sections.

e. Respond to the following:

1. In Year 1, by adopting the MACRS method of depreciation for tax purposes instead of the straight-line method, what is the difference in the amount of cash paid for income taxes?
2. In the long term, after equipment has been disposed of, is there any difference in total income under the two methods?
3. In the long term, after equipment has been disposed of, is there any difference between total income tax expense and total income tax paid?
4. Explain why Crist Company would use two different depreciation methods, particularly the straight-line method for the financial statements and an accelerated method (MACRS) for reporting to the IRS.

ATC 8-10 Spreadsheet Assignment: Alternative Methods of Depreciation

Short Company purchased a computer on January 1, Year 1, for $5,000. An additional $100 was paid for delivery charges. The computer was estimated to have a life of five years or 10,000 hours. Salvage value was estimated at $300. During the five years, the computer was used as follows:

Required

a. Prepare a five-year depreciation schedule for the computer using the straight-line depreciation method. Be sure to use formulas for all computations including depreciation expense. Set up the following headings for your schedule:

b. Prepare another five-year depreciation schedule for the computer using the units-of-production method. Use (copy) the headings used in Requirement a.

c. Prepare another five-year depreciation schedule for the computer using the double-declining-balance method. Use (copy) the headings used in Requirement a.

d. Prepare another five-year depreciation schedule for the computer using the MACRS method. Use (copy) the headings used in Requirement a.

Spreadsheet Tip:

After Year 1, enter subsequent dates automatically. Position the mouse in the lower right-hand corner of the highlighted cell “Year 1” until a thin cross appears. Click and drag down four additional rows