On August 3, Cinco Construction purchased special-purpose equipment at a cost of $5,709,200. The useful life...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $5,709,200. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $28,920.

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

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a. Straight Line Method:

	Purchase Cost		$ 5,709,200
	Less: Residual Value		$ 28,920
	Depreciable Value on August 3		$ 5,680,280
	Depreciation Year 1	Half Year	$ 355,018
	Depreciation Year 2		$ 710,035
	Depreciation Year 3		$ 710,035
	Depreciation Year 4		$ 710,035
	Depreciation Year 5		$ 710,035
	Depreciation Year 6		$ 710,035
	Depreciation Year 7		$ 710,035
	Depreciation Year 8		$ 710,035
	Depreciation Year 9		$ 355,018

	Total Depreciation		$ 5,680,280

b.Double Declining
	Rate	100/8*2	25.0%

	Year	Value	Depreciation
	1	$ 5,709,200	$ 713,650.0	Half Year
	2	$ 4,995,550	$ 1,248,888
	3	$ 3,746,663	$ 936,666
	4	$ 2,809,997	$ 702,499
	5	$ 2,107,498	$ 526,874
	6	$ 1,580,623	$ 395,156
	7	$ 1,185,467	$ 385,516	SLM	(1185467-28920)/3
	8	$ 799,951	$ 385,516	SLM
	9	$ 414,435	$ 385,516	SLM

		Total Dep	$ 5,680,281

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