On August 3, Cinco Construction purchased special-purpose equipment at a cost of $5,756,300. The useful life...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $5,756,300. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $49,070.

a. Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the straight-line depreciation method (half-year convention).

b. Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the 200 percent declining-balance method (half-year convention) with a switch to straight-line when it will maximize depreciation expense.

c. Which of these two depreciation methods (straight-line or double-declining-balance) results in the highest net income for financial reporting purposes during the first two years of the equipment’s use?

Expert Solution

		Total cost of equipment (B)	$5,756,300
		Less: Residual value (B)	($49,070)
		Balance depreciable value (C=A-B)	$5,707,230
		Life (Years)	8
1	Year	Depreciation under straight line method	Calculation
	1	$356,701.88	(5,707,230/8/2)
	2	$713,403.75	(5,707,230/8)
	3	$713,403.75	(5,707,230/8)
	4	$713,403.75	(5,707,230/8)
	5	$713,403.75	(5,707,230/8)
	6	$713,403.75	(5,707,230/8)
	7	$713,403.75	(5,707,230/8)
	8	$713,403.75	(5,707,230/8)
	9	$356,701.88	Balance

2	*Deprecation rate double declining method = (100/82 = 25%)**
	Under 200% declining balance method (Half yearly convention)
	Year	Depreciation	Balance	Calculation	Under straight line method
	1	719,538	$5,036,763	(5,756,300*25%/2)	$664,901.67
	2	1,259,191	$3,777,572	(5,036,763*25%)	$573,472.60
	3	944,393	$2,833,179	(3,777,572*25%)	$506,032.53
	4	708,295	$2,124,884	(2,833,279*25%)	$461,085.37
	5	531,221	$1,593,663	(2,124,884*25%)	$441,046.61
	6	441,047	$1,152,617	As per straight line method	$441,046.61	Depreciation as per straight line method is greater than 200% depreciation method (441,046 > 398,416) Hence dep as per straight line applicable for balance period
	7	441,047
	8	441,047
	9	221,453
	Total	5,707,230

3	Which of these two depreciation methods (straight-line or double-declining-balance) results in the highest net income for financial reporting purposes during the first two years of the equipment’s use?
1st year	Depreciation as per Straight line method will give Higher income since Depreciation expenses is greater than 200% declining balance method (719,538 >356,072)
2nd Year	Depreciation as per Straight line method will give Higher income since Depreciation expenses is greater than 200% declining balance method (1,259,191 >713,404)

ekkarill92 answered 2 years ago

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