Five Points Construction Co. specializes in building replicas of historic houses. Sharon Higgs, president of Five Points, is considering the purchase of various items of equipment on July 1, 2004, for $120,000. The equipment would have a useful life of five years and no residual value.

In the past, all equipment has been leased. For tax purposes, Sharon is considering depreciating the equipment by the straight-line method. She discussed the matter with her CPA and learned that, although the straight-line method could be elected, it was to her advantage to use the modified accelerated cost recovery system (MACRS) for tax purposes. She asked for your advice as to which method to use for tax purposes.

1. Compute depreciation for each of the years (2004, 2005, 2006, 2007, 2008, and 2009) of useful life by

(a) The straight-line method and

(b) MACRS.

In using the straight-line method, one-half year’s depreciation should be computed for 2004 and 2009. Use the MACRS rates presented in the chapter.

2. Assuming that income before depreciation and income tax is estimated to be $200,000 uniformly per year and that the income tax rate is 30%, compute the net income for each of the years 2004, 2005, 2006, 2007, 2008, and 2009 if

(a) The straight-line method is used and

(b) MACRS is used.

3. What factors would you present for Sharon’s consideration in the selection of a depreciation method?