Question

P9.9A  

(LO 2, 6), AP Megan Corporation purchased machinery on January 1, 2022, at a cost of $250,000. The estimated useful life of the machinery is 4 years, with an estimated salvage value at the end of that period of $30,000. The company is considering different depreciation methods that could be used for financial reporting purposes.

Instructions

a.  Prepare separate depreciation schedules for the machinery using the straight-line method, and the declining-balance method using double the straight-line rate. (Round to the nearest dollar.)

Double-declining-balance expense 2024

$31,250

b.  Which method would result in the higher reported 2022 income? In the highest total reported income over the 4-year period?

c.  Which method would result in the lower reported 2022 income? In the lowest total reported income over the 4-year period?

Answer 1

a) Schedule of depreciation as per Straight-line and double straight line shown below:

Straight Line:
Cost of Asset	250000
No. of years of useful life	4
Salvage Value	30000
Depreciation = (Cost of asset - Salvage Value) / No. of years of useful life = (250000 - 30000) / 4	55000
			Depreciation Amount
Year	Opening Balance	Salvage Value	Formula	Amount	Accumulated Depreciation	Closing Balance
2022	2,50,000	30,000	Calculated above	55,000	55,000	1,95,000
2023	1,95,000	-	Calculated above	55,000	1,10,000	1,40,000
2024	1,40,000	-	Calculated above	55,000	1,65,000	85,000
2025	85,000	-	Calculated above	55,000	2,20,000	30,000
Double declining on straight line basis:
Cost of Asset	250000
No. of years of useful life	4
Salvage Value	30000
Depreciation Rate = 1/No. of years of useful life X 2	50%
			Depreciation Rate		Depreciation Amount
Year	Opening Balance	Salvage Value	Formula	Rate	Formula	Amount	Accumulated Depreciation	Closing Balance
2022	2,50,000	-	Calculated above	50%	(250000 X 50%)	1,25,000	1,25,000	1,25,000
2023	1,25,000	-	Calculated above	50%	(125000 X 50%)	62,500	1,87,500	62,500
2024	62,500	-	Calculated above	50%	(62500 X 50%)	31,250	2,18,750	31,250
2025	31,250	30,000	Depreciation Expenses / Opening Balance = 1250 / 31250	4%	(Opening Balance - Salvage Value)	1,250	2,20,000	30,000

b) For the years 2022, Straight line method would result in reporting higher income since the depreciation as per straight line is lower than double straight line and hence, the business would deduct lower expenses and thereby reporting higher income. Further, for years 2024 and 2025, double straight line method would result in reporting higher income since the depreciation as per double straight line is lower than straight line and hence, the business would deduct lower expenses and thereby reporting higher income.

c) For the years 2022, double Straight line method would result in reporting lower income since the depreciation as per double straight line is higher than straight line and hence, the business would deduct higher expenses and thereby reporting lower income. Further, for years 2024 and 2025, straight line method would result in reporting lower income since the depreciation as per straight line is higher than double straight line and hence, the business would deduct higher expenses and thereby reporting lower income.