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IMANET Exam CMA Topic 2 Question 7 Discussion

Actual exam question for IMANET's Certified Management Accountant exam
Question #: 7
Topic #: 2
[All Certified Management Accountant Questions]

Assume that the old equipment must be sold in order to purchase the new equipment. Given a constant effective corporate income tax rate and straight-line depreciation on both disposed and newly purchased pieces of equipment, the depreciation tax shield dung the later years of a capital project, assuming the old equipment was not yet full depreciated when it was disposed of, is general?

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Suggested Answer: A

Older equipment that is being disposed of is reaching the end of its productive he. Thus, in the early years of the project, the depreciation expense on the new equipment only provides an incremental tax benefit since there was some depreciation expense still being recognized on the old equipment. Once the time of the old equipment's useful life has passed, all the depreciation tax shield is being provided by the (higher) expense being recognized on the new equipment.


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