Durham Machinery bought special tooling equipment for $2.6 million. For financial reporting purposes, the estimated useful life is 5 years, with no residual value. For tax purposes, assume MACRS specifies a 3-year, DDB depreciation schedule. Durham Machinery uses the straight-line depreciation method for reporting to shareholders.
1. Explain the two factors that account for the acceleration of depreciation for tax purposes.
2. Compute the first year’s depreciation (a) for shareholder reporting, and (b) for tax purposes. (Ignore complications in the tax law that are not introduced in this text.)