Depreciation Expense/ Please help answer in detail On July 1, Srini Construction

Question

Depreciation Expense/ Please help answer in detail

On July 1, Srini Construction purchased special-purpose equipment at a cost of $1,000,000. The useful life of the equipment was estimated to be 5 years, with a residual value of $50,000.

a.     Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the straight-line depreciation method.

b.     Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the 200 percent (double) declining-balance method.

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

Explanation / Answer

100% / 8 years = 12.5% Straight-Line Percentage
12.5% x 2 = 25% Double-Declining Balance Percentage


(DD) = Double-Declining
Year 1
1,000,000 x 25% = $250,000 (DD)Depreciation Expense. New book value = $750,000
Year 2
750,000 x 25% = $187,500 (DD) Depreciation Expense. New book value = $562,500
Year 3
562,500 x 25% = $140,625 (DD) Depreciation Expense. New book value = $421,875
Year 4
421,875 x 25% = $105,469 (DD) Depreciation Expense. New book value = $316,406.
Year 5
316,406 x 25% = $79,102 (DD) Depreciation Expense. New book value = $237,304
Year 6
237,304 x 25% = $59,326 (DD) Depreciation Expense.
(237,304 - 50,000 salvage value) / 3 years depreciation remaining = $62,435 Straight-Line Depreciation Expense. Since straight-line depreciation now yields a higher depreciation expense, it will be used for this year and the next two.
Year 7
$62,435 Depreciation Expense
Year 8
$62,434 (because of rounding) Depreciation Expense

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