Question
Case 3.2 Charlotte Honey Bee Company Charlotte Honey Bee Company (CHBC) is considering the acquisition of equipment that would cost $200,000 to acquire and set
Case 3.2 Charlotte Honey Bee Company
Charlotte Honey Bee Company (CHBC) is considering the acquisition of equipment that would cost $200,000 to acquire and set up. CHBC expects a useful life of six years from this equipment, at which time it estimates that it could sell the equipment for $20,000. CHBC expects to generate net income of $50,000 each year before depreciation.
A. If CHBC uses straight-line depreciation, what is its expected net income after depreciation but before tax for this equipment each year?
B. If this equipment is classified as a 5-year asset for tax purposes, what is CHBCs depreciation for tax purposes each year?
C. What, if any, is the gain or loss for tax purposes if CHBC sells the equipment at the end of six years for $20,000?
D. If CHBCs income before depreciation is the same for both financial reporting and tax purposes, what is the difference in income for reporting and tax purposes each year? [Caution: Remember to include your result from Part C, if appropriate.]
E. What method of depreciation for financial reporting purposes do you recommend? Explain your recommendation.
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