Assume that a "temporary" additional (US federal tax related) first-year bonus depreciation of 50 percent applies to a new, $100,000 piece of equipment purchased by Bellemans Chocolatier, Inc. The asset has a $10,000 estimated final salvage value. If this asset is fully depreciated for tax purposes over its useful life, the overall amount that Bellemans will have depreciated for tax purposes is .
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A. B. C. D.B
First, let's define some terms:
Bonus Depreciation: A tax incentive that allows businesses to deduct a larger portion of the cost of qualifying property in the year it is placed in service. It is meant to stimulate investment in the economy by incentivizing businesses to purchase new equipment or property.
Salvage value: The estimated value of an asset at the end of its useful life.
Depreciation: The accounting method used to allocate the cost of an asset over its useful life.
Given that Bellemans Chocolatier, Inc. purchased a new piece of equipment for $100,000, and that a temporary additional first-year bonus depreciation of 50% applies, the total amount of bonus depreciation that can be taken in the first year is $50,000 (50% of $100,000). This means that Bellemans can deduct $50,000 from their taxable income in the first year, in addition to regular depreciation deductions.
To calculate regular depreciation, we need to determine the useful life of the equipment. Let's assume that the useful life of the equipment is 5 years. This means that the total depreciation expense for the equipment, without bonus depreciation, would be $18,000 per year ($90,000 divided by 5 years).
However, because Bellemans can take an additional $50,000 in bonus depreciation in the first year, the total amount that can be depreciated in the first year is $68,000 ($50,000 bonus depreciation + $18,000 regular depreciation).
For the remaining 4 years, the regular depreciation expense would be $18,000 per year. At the end of the useful life of the equipment, the estimated salvage value is $10,000.
Therefore, the overall amount that Bellemans will have depreciated for tax purposes is:
$68,000 (first year) + ($18,000 x 4 years) = $140,000
However, we need to subtract the estimated salvage value of $10,000 from this amount, since it cannot be depreciated.
$140,000 - $10,000 = $130,000
Therefore, the correct answer is option C, $135,000.