Question

Balls & Bats, Inc. purchased equipment on January 1, 2005 at a cost of $100,000. Estimated useful life is 4 years with a salvage value of $10,000.

1. Prepare two different depreciation schedules for the equipment, one using double-declining balance method and the other using the straight line method.

2. Which method would result in the greatest net income for the year ending Dec 31, 2005

3. How would taxes affect management's choice between these two methods for the financial statements?

Answer 1

Working Note -

1. Straight Line Method -

2. Double Declining Balance Depreciation -

3. Straight Line Method result in the greatest net income for the year ending Dec 31, 2005.

As per the SLM Method depreciation for the year 2005 is $22,500 and as per double declining balance the depreciation is $50,000.

HIgher the cost lower will be the net income hence SLM shows lower cost and hence higher income.

4. If the management thinks tax point of view then higher the cost lower the income ultimatly result in lower tax expense. If the company thinks of tax expense in the company. To minimise the tax expense company may opt for higher depreciation to get lower net income.

In such a case company may opt for Double declining balance Depreciation.