On August 3, Cinco Construction purchased special-purpose equipment at a cost of $9,911,000. The useful life...
On August 3, Cinco Construction purchased special-purpose equipment at a cost of $9,911,000. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $26,750.
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?
Homework Answers
a. Depreciation expense per year = [9911000 -26750] / 8
= $1235531
| Year | Depreciation expense |
| 1 | 1235531/2 = $617766 |
| 2 | $1235531 |
| 3 | $1235531 |
| 4 | $1235531 |
| 5 | $1235531 |
| 6 | $1235531 |
| 7 | $1235531 |
| 8 | $1235531 |
| 9 | 1235531/2 = $617766 |
| Total | 9884249 |
b. 200 percent declining-balance rate = 1/8 * 200%
= 25%
| Year | Book value at beginning [Cost - Depreciation expense per year] | Depreciation expense |
| 1 | $9,911,000 | 9911000*25%*1/2 = 1238875 |
| 2 | 8672125 | 8672125 *25% = 2168031 |
| 3 | 6504094 | 6504094*25% =1626024 |
| 4 | 4878070 | 4878070*25% = 1219518 |
| 5 | 3658553 | 3658553 *25% = 914638 |
| 6 | 2743915 | 2743915 *25% =685979 |
| 7 | 2057936 | 2057936*25% = 514484 |
| 8 | 1543452 | 1543452*25% = 385863 |
| 9 | 1157589 | 1130839 |
| Total | 9884250 |
3. straight-line method results in the highest net income as its two year depreciation expense is lesser than the double-declining-balance)
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