Question

Che On August 3. Cinco Construction purchased special purpose equipment at a cost of $5,239,900. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $37,830. 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? Complete this question by entering your answers in the tabs below. Required A Required B Required 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. (Adjust year 9 depreciation, if necessary, so that the total depreciation expense equals depreciable value of the asset. Do not round Intermediate calculations and round your final answers to the nearest whole number) Show less 200% Declining- Year Balance (Half- Year Convention)

Answer 1

Answer is given below

a Depreciation Expense Year Straight Line Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Totals Switch is made 200% Double Declining Balance (Half year convention) $654,988 $1,146,228 $859,671 $644,753 $483,565 $362,674 $272,005 $204,004 $574,182 $5,202,070 $325,129 $650,259 $650,259 $650,259 $650,259 $650,259 $650,259 $650,259 $325,129 $5,202,070 Year Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Totals Double Declining Balance $654,988 $1,146,228 $859,671 $462,033 $462,033 $462,033 $462,033 $462,033 $231,017 $5,202,070 Switch is made in 4th year Book value at end of year Residual value Net cost to depreciation Balance year Deprecation $2,579,013 $37,830 $2,541,183 5.50 $462,033 c Straight line depreciation leads to higher net income for financial reporting purpose during the first 2 years Calculations Straight Line method Cost Residual value $5,239,900 $37,830 Yearly Years Depreciation 7 8 $650,259 Double declining balance method Opening Year Rate Balance Year 1 $5,239,900 X 25.00% Year 2 $4,584,913 x 25.00% Year 3 $3,438,684 X 25.00% Year 4 $2,579,013 X 25.00% Year 5 $1,934,260 x 25.00% Year 6 $1,450,695 x 25.00% Year 7 $1,088,021 x 25.00% Year 8 $816,016 X 25.00% Year 9 $612,012 X 25.00% Yearly Depreciation $654,988 $1,146,228 $859,671 $644,753 $483,565 $362,674 $272,005 $204,004 $574,182 Closing balance $4,584,913 half year $3,438,684 $2,579,013 $1,934,260 $1,450,695 $1,088,021 $816,016 $612,012 $37,830 Year 9 Depreciation will be balancing to keep Residual value as balance Double Declining method working number of years useful life Depreciation rate of automobile (1/number of years) DDB Depreciation rate 12.50% 25.00%