COLLEGE OF ENGINEERING

Depreciation and Income Taxes Assessment

Name: Course, Year and Section:

Test I: Identification
___________1. Number of years over which the basis of a property is recovered through the
accounting process.
___________2. A method that is very attractive to profitable companies.
___________3. Amount of income which is liable to tax. It means how much income an
individual or company owes to the government in the current tax year.
___________4. The additional tax paid for every additional dollar earned as income.
___________5. Assessed as a function of gross revenues minus allowable deductions.
___________6.Assessed as a function of the sale of certain goods or services often considered
non-necessities and are hence independent of the income or profit of a business.
___________7. Actual cash cost + BV of the trade-in.
___________8. The difference between the company’s adjusted net operating profit after taxes
in a particular year and its after-tax cost of capital during that year.

Test II: True or False

_____1. Depreciation does not affect Before Tax Cash Flows.
_____2. If a firm has a federal taxable income bracket of 19,000,000 to 20, 000, 000 dollars, it
will most likely have a 35% state income tax rate.
_____3. Modified Accelerated Cost Recovery is a depreciation system used for income
purposes in the US.
_____4. Gross income is the “take-home” money after deductions for taxes, health insurance
and retirement contributions (i.e., SSS, Philhealth and Pag-ibig).
_____5. Weighted Average Cost of Capital analysis assumes that capital markets (both debt
and equity) in any given industry require returns commensurate with the perceived riskiness of
their investments.
_____6. The MACRS system puts fixed assets into classes that have set depreciation periods.
_____7. Useful life is the estimated period that the asset will be used in a trade of business to
produce income.

Test III: Enumeration

1-3. 3 types of depreciation methods
4-5. 2 systems for computing depreciation deductions in MACRS

Test IV: Problem Solving

1. Suppose a firm has a federal taxable income bracket of 10 to 15 million dollars and a
state income tax rate of 5%, what is its effective income tax rate?
 COLLEGE OF ENGINEERING

2. Lianne established her own company. She plans to invest in a server system that costs
$37,000. Using the MACRS, the system has a useful life of 10 years. Determine the
following:
a. Book value at the end of the 4th year
b. Allowable depreciation for the 3rd year