Depreciation Sosa Enterprises purchased a new machine for $12,600 to make cork stoppers for wine bottles. The machine has a 3-year recovery period and is expected to have a salvage value of $1,870. For tax purposes, the company can either use the MACRS schedule in the table to calculate depreciation expenses, or it can write off the asset's entire cost this year taking advantage of the tax code's 100% bonus depreciation provision. Comment on how each method influences Sosa's reported earnings, this year and for the next 3 years. Also comment on how each method affects cash flows over the same horizon. Which method do you think Sosa should choose and why? De has use yea So sar Usi (Ro (Click on the icon here in order to copy the contents of the data table below into a spreadsheet.) Rounded Depreciation Percentages by Recovery Year Using MACRS for First Four Property Classes Percentage by recovery year* Recovery year 3 years 5 years 7 years 1 33% 20% 14% 45% 32% 25% 15% 19% 18% 7% 12% 12% 12% 9% 5% 9% 9% 4% 23456TB9O 8 10 10 years 10% 18% 14% 12% 9% 8% 7% 6% 6% 6% ne Usi (Rd 11 4% 100% Totals 100% 100% 100% *These percentages have been rounded to the nearest whole percent to simplify calculations while retaining realism. To calculate the actual depreciation for tax purposes, be sure to apply the actual unrounded percentages or directly apply double-declining balance (200%) depreciation using the half-year convention. Using the MACRS depreciation method, complete the depreciation schedule for the asset below: (Round the percentage to the nearest integer and the depreciation to the nearest dollar.) Depreciation Schedule Cost Year Percentage (2) Depreciation (1) (2) (1) 1 $12,600 (Round the percentage to the nearest integer and the depreciation to the nearest dollar.) Depreciation Schedule Cost Year Depreciation (1) (2) (1) 2 $12,600 $ Percentage (2) (Round the percentage to the nearest integer and the depreciation to the nearest dollar.) Depreciation Schedule Cost Depreciation Year Percentage (2) (1) (1)(2) 3 $12,600 (Round the percentage to the nearest integer and the depreciation to the nearest dollar.) Depreciation Schedule Cost Year Depreciation (1) x (2) (1) 4 $12,600 Percentage (2) Using the bonus depreciation method, complete the depreciation schedule for the asset below: (Round the percentage to the nearest integer and the depreciation to the nearest dollar.) Depreciation Schedule Cost Year Depreciation (1) (2) (1) 1 $12,600 % (Round the percentage to the nearest integer and the depreciation to the nearest dollar.) Depreciation Schedule Cost Year Depreciation (1) (2) (1) 2-4 $12,600 Percentage (2) Percentage (2) Which method do you think Sosa should choose and why? (Select the best choice below.) A. Sosa should choose bonus depreciation because it accelerates the depreciation deductions and hence the tax savings associated with those deductions. B. Sosa should choose MACRS depreciation because it diminishes the depreciation deductions and hence accelerates the tax savings associated with those deductions. C. Sosa should choose bonus depreciation because it diminishes the depreciation deductions and hence accelerates the tax savings associated with those deductions. D. Sosa should choose MACRS depreciation because it accelerates the depreciation deductions and hence the tax savings associated with those deductions
