Johnson Family Care Inc. is a large ambulatory care center that provides comprehensive 24-hour
primary and specialty care to a large suburban population in Pennsylvania. The center recently purchased
new clinical laboratory equipment for $1.1 million and spent $22,000 to renovate a center room to
accommodate the new equipment. The useful life of the equipment is estimated to be ten years, after which
it can be sold for $75,000. Johnson uses a straight-line method to calculate book depreciation and pays tax at
a rate of 40 percent. The equipment falls into the MACRS seven-year class.
b. What annual depreciation expense will be reported for tax purposes?
c. Suppose Johnson sells the laboratory equipment at the end of Year 4 for $400,000. What impact would
this have on the taxes paid by the center?