Question

for $4 million. The Problell2 On January 1, 2020, Velio Company, a tool manufacturer, acquired new industrial equipment new equipment had a useful life of four mates that the new equipment can produce by 1,000 units per year over the remaining useful life of the equipment. years, and the residual value was estimated to be $400,000. Velio esti Analyzing the Effect o Depreciation Method on Financial Statemer 14,000 tools in its first year. Production is then estimated to decline Results LO9 The following depreciation methods are under consideration: (I) double-declining, (2) straight-line, (3) sum-of-the-years'-digits, and (4) units-of-production Required a. Which depreciation method would result in maximum income for financial statement reporting for the three- year period ending December 31, 2022? Prepare a schedule showing the amount of accumulated deprecia- tion at December 31, 2022, under the method selected. Ignore present value, income tax, and deferred in- come tax considerations in the answer. b. Which depreciation method would result in minimum income for tax reporting for the three-year period ending December 31, 2022? (Assume that all four methods are allowable for tax purposes.) AICPA adapted

Answer 1

(a)Which depreciation method would maximize net income for financial statement reporting for the3-year period ending December 31, 2022? Prepare a schedule showing the amount ofaccumulated depreciation at December 31, 2022, under the method selected. Ignore presentvalue, income tax, and deferred income tax considerations
The straight-line method would provide the highest total net income for financial reporting over the three years, as it reports the lowest total depreciation expense. These computations are provided below:
(1) Straight-line:
Cost	$                                  40,00,000.00
Salvage value	$                                    4,00,000.00
Depreciable value	$                                  36,00,000.00
Life	4
Annual depreciation expense	$                                    9,00,000.00
Year	Depreciation Expense	Accumulated Depreciation
2020	$                                    9,00,000.00	$          9,00,000.00
2021	$                                    9,00,000.00	$        18,00,000.00
2022	$                                    9,00,000.00	$        27,00,000.00
Total	$                                  27,00,000.00
(2) Double-declining balance:
Straight-line depreciation rate = 1/4	25%
Double-declining balance depreciation computed as 2 × SL rate × beginning NBV
Year	Net book value at the beginning	Depreciation Expense "Double-declining balance depreciation computed as 2 × SL rate × beginning NBV"	Accumulated Depreciation	Net book value, end of year
2020	$                                  40,00,000.00	$        20,00,000.00	$ 20,00,000.00	$ 20,00,000.00
2021	$                                  20,00,000.00	$        10,00,000.00	$ 30,00,000.00	$ 10,00,000.00
2022	$                                  10,00,000.00	$          5,00,000.00	$ 35,00,000.00	$   5,00,000.00
Total		$        35,00,000.00
(3) Sum-of-the-years’-digits:
sum of the years' digits depreciation base = (Estimated life x Estimated life + 1)/2
Sum of the years' digits depreciation = (4 x 5)/2 =	10
Year	Depreciation Expense		Accumulated Depreciation
2020	[(4/10) ×( $4,000,000 -400000)]	$        14,40,000.00	$ 14,40,000.00
2021	[(3/10) ×( $4,000,000 -400000)]	$        10,80,000.00	$ 25,20,000.00
2022	[(2/10) ×( $4,000,000 -400000)]	$          7,20,000.00	$ 32,40,000.00
Total		$        32,40,000.00
(4) Units-of-output:
		Year	Expected	Depreciation	Accumulated
			Output	Expense	Depreciation
Cost	4000000	2020	14,000	$ 10,08,000.00	$ 10,08,000.00
Salvage value	4,00,000	2021	13,000	$   9,36,000.00	$ 19,44,000.00
Depreciable value	36,00,000	2022	12,000	$   8,64,000.00	$ 28,08,000.00
Expected life output	50,000	2023	11,000	$   7,92,000.00	$ 36,00,000.00
Unit depreciation expense	72	Total units	50,000
b) Which depreciation method (MACRS or optional straight-line) would minimize net income for income tax reporting for the 3-year period ending December 31, 2022?
The method that minimizes income taxes in the third year is the double-declining-balance method, which produces the highest accumulated depreciation .