Determine the tax depreciation for motorola

Question

Problem:

Motorola and Intel are both in the semiconductor industry and compete in many of the same product sectors. But each uses a different depreciation method. Motorola's Year 2 10-K states the following:

Depreciation is recorded principally using the declining -balance method based on the estimated useful lives of the assets (building and building and equipment, 5-50 years; machinery and equipment, 2-12 years).

So, Motorola is using accelerated depreciation for most of its assets. By contrast, Intel's Year 2 report says:

Depreciation is computed for financial reporting purposes principally by use of the straight-line method over the following estimated useful lives: machinery and equipment, 2 to 4 years; land and buildings, 4 to 45 years.

The following table gives several key financial statement figures for each company from its respective Year 2 10-k and excerpts from its income tax footnote:

Motorola
(in millions)		Year 2	Year 1
book depreciation		2308	1919
income before income taxes		1775	3225
property, plant, and equipment, net of accumulated depreciation (at year-end)		9768	9356
		31-Dec
Significant Deferred Tax Assets (Liabilities)		Year 2	Year 1
Inventory reserves		440	345
contract accounting methods		231	157
employee benefits		291	286
capitalized items		138	89
tax basis differences on investments		-199	-176
depreciation		-213	-197
deferred taxes on non-U.S. earnings		-545	-382
other deferred income taxes		329	132
net deferred tax asset		472	254
Intel
(in millions)		Year 2	Year 1
book depreciation		1888	1371
income before income taxes		7934	5638
property, plant, and equipment, net of accumulated depreciation (at year-end)		8487	7471
		31-Dec
Significant Deferred Tax Assets (Liabilities)		Year 2	Year 1
deferred tax assets
Accrued compensation and benefits		71	61
deferred income		147	127
inventory valuation and related reserves		187	104
interest and taxes		54	61
other, net		111	55
		570	408
deferred tax liabilities
depreciation		-573	-475
unremained earnings of certain subsidiaries		-359	-116
other, net		-65	-29
		-997	-620

1. Using the information provided and the analytical techniques, determine the tax depreciation for Motorola and Intel for Year 2.

2. Adjust each firm's pre-tax income to reflect the same depreciation method and useful lives used for tax purposes.

3. Explain why the adjusted numbers provide a better basis for comparing the operating performance of the two companies.