On August 3, Cinco Construction purchased special-purpose equipment at a cost of $1,938,400. The useful life...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $1,938,400. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $83,040.

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

a. Straight-line depreciation method( half year convention):

Annual depreciation = ( Cost - Residual Value) / Estimated Useful Life = $ ( 1,938,400 - 83,040 ) / 8 = $ 231,920.

Year	1	2	3	4	5	6	7	8	9
Depreciation Expense	115,960	231,920	231,920	231,920	231,920	231,920	231,920	231,920	115,960

b. 200 percent declining balance method ( half-year convention) :

Depreciation rate under straight-line = 1/8 = 0.125

Depreciation rate under 200 percent double declining method : 0.125 x 2 = 0.25

Year	1	2	3	4	5	6	7	8	9
Computation of depreciation expense	1,938,400 x 0.25 x 1/2	( 1,938,400 - 242,300) x 0.25	( 1,938,400 - 666,325) x 0.25	( 1,938,400 - 984,344) x 0.25	(1,938,400 - 1,222,858) x 0.25	(1,938,400 - 1,401,743) x 0.25	( 1,938,400 - 83,040- 1,535,907) x 1/3
Depreciation expense	242,300	424,025	318,019	238,514	178,885	134,165	106,484	106,484	106,484

c. The straight-line method with lower depreciation expense during the first few years, will result in the highest net income for financial reporting purposes in the first two years.

ekkarill92 answered 1 year ago

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $7,092,800. The useful life...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $7,092,800. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $52,490. 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...

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...

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...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $7,653,800. The useful life...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $7,653,800. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $61,540. 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...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $7,536,100. The useful life...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $7,536,100. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $66,920. 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...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $7,461,000. The useful life...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $7,461,000. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $34,160. 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...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $4,883,900. The useful life...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $4,883,900. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $95,890. 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...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $7,377,200. The useful life...

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $7,377,200. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $10,940. 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...

On January 5, 2012, Mountain View Company purchased construction equipment for $698,400, with a useful life...

On January 5, 2012, Mountain View Company purchased construction equipment for $698,400, with a useful life of six years and an estimated salvage value of $87,000. The company uses the straight-line method of depreciation. On July 3, 2016, this equipment was traded for new similar construction equipment that has a value of $800,000. The company paid $595,000 in cash and was given a trade-in allowance of $205,000 for the old equipment. Prepare the general journal entries needed on July 3,...

On Jan 3, 2017, Limestone Enterprises purchased equipment for $134,500. The equipment has a useful life...

On Jan 3, 2017, Limestone Enterprises purchased equipment for $134,500. The equipment has a useful life of five years or of 15,000 working hours and after the useful life it will have a residual value of $12,000. The machine was used for 1,400 hours in 2017, 2,100 hours in 2018; 3,700 hours in 2019. Required: 1. Calculate the depreciation expense for 2017 and 2018 under each of the following methods: i. Straight-line, ii. Double diminishing-balance, and iii. Units-of -production 2. Record the journal entry for...

Question