In Example 14-4, how did depreciation affect the cash flow for the construction company? Example 14-4 The
Question:
In Example 14-4, how did depreciation affect the cash flow for the construction company?
Example 14-4
The new computer system, included in the general overhead budget, will be subject to 200% declining balance depreciation using the half-year convention and a five-year life. Depreciation from previous years’ purchases of office equipment is $6,000 for the year. The company has an outstanding loan with a payment of $1,626 per month. Of the entire years’ loan payments, $10,900 will be in the form of interest and the remaining will reduce the outstanding loan balance. The surplus cash from each month will be placed in a bank account earning a monthly interest rate of 0.5%. Negative cash flows will be covered by funds in this bank account. At the beginning of the year, the balance for the bank account will be $200,000. Inasmuch as the company is an S corporation, the estimated income taxes for the year will be distributed to the company’s owners at the end of the year. The disbursement will be based on a marginal tax rate of 35%.
Step by Step Answer:
Construction Accounting And Financial Management
ISBN: 9780135232873
4th Edition
Authors: Steven J. Peterson