Your company has purchased two machines on January 1, 2021, to be used in production from two

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Question:

Your company has purchased two machines on January 1, 2021, to be used in production from two different companies.

Machine #1 - the machine cost $150,000. Your company bought it as a special deal at the Steele County Free Fair from Fast Deals Now. They were able to finance the machine by taking a loan out at the State Bank of Waterville. The loan requires simple interest (unheard of) at 18% per year (paid annually) and to pay it off, they have only required a lump sum payment at the end of year 7.

Machine #2 - the machine was purchased from Large Lumpy Sales. Annual payments on this machine are due the last day of the year and amount to $438,235.43 each year for seven years. The market interest rate is currently at an annual 12% rate and the machine is expected to last for 7 years.

REQUIRED:

1. List the amount each machine should be listed for in the records for Plant Equipment.

2. Depreciation needs to be calculated for financial statement purposes for the first three years using the following methods so we can compare potential income reporting scenarios: a. Straight-line b. Sum-of-the-year digits

3. Calculate the MACRS depreciation deduction on the tax return assuming a 5-year life for the first three years as well.

4. All else being equal, what will be the difference in net income each year between the financial statements and taxable income on the tax returns (taxable income) if a company uses straight-line depreciation for financial statements and MACRS for tax for the first three years.