Southport Company Is Considering the Purchase of a Piece of Equipment

question 4

Multiple Choice

Southport Company is considering the purchase of a piece of equipment that costs $100,000.The equipment would be depreciated on a straight-line basis to its expected salvage value of $10,000 over its 10-year useful life.Assuming a tax rate of 40%,what is the annual amount of the depreciation tax shield provided by this investment?

• A) $4,000
• B) $9,000
• C) $3,600
• D) None of these answers is correct.

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Definitions:

Over-Applied Overhead

A situation in cost accounting where the allocated overhead for a period exceeds the actual overhead costs incurred.

External Financial Reporting

The process of providing financial information to outside parties, such as investors and creditors, through statements and reports.

Over/Underabsorbed Overhead

The difference between the overhead costs applied to products and the actual overhead costs incurred.

Income Statement

A financial statement that shows a company's revenues and expenses over a specific period, ending with net income or loss.