One Hour Laundry Services purchased a new steam press machine on January 1, for

Question

One Hour Laundry Services purchased a new steam press machine on January 1, for $36,500. It is expected to have a five-year useful life and a $3,800 salvage value. One Hour expects to use the equipment more extensively in the early years. c uhaser anda $80 atae ale One io cuiredate the depeciaion expense for each of the tive depreciation. (Omit the "" sign in your response.) Required apeamcin nyornne Depreciation expense Years 4 (b) Calculate the depreciation expense for each of the five years, assuming the use of double-declining- balance depreciation. (Round your answers to the nearest dollar amount. Omit the "$" sign in your response.) Depreciation expense Years 4 (c) Would the choice of one depreciation method over another produce a different amount of annual cash flow for any year? (Assume Income tax effects) (Click to select

Explanation / Answer

(a) SLM

Annual depreciation = (Cost - Salvage value) / Useful life = $(36,500 - 3,800) / 5

= $32,700 / 5 = $6,540 per year

(b) DDB

DDB Depreciation ignores salvage value.

SLM depreciation rate = 1 / 5 = 20%

DDB Depreciation rate = 2 x SLM rate = 2 x 20% = 40%

(c) YES

(d) Gain/(Loss) from sale = Sale price - (Initial cost - Accummulated depreciation)

Accummulated depreciation at end of year 3, SLM = $6,540 x 3 = $19,620

Gain from sale under SLM = $(21,000 - 36,500 + 19,620) = $4,120

Accummulated depreciation at end of year 3, DDB = $(14,600 + 8,760 + 5,256) = $28,616

Gain from sale under DDB = $(21,000 - 36,500 + 28,616) = $13,116

Year Depreciation expense ($) 1 6,540 2 6,540 3 6,540 4 6,540 5 6,540

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