r phot equipment. In addition to the purchase price, Griffin paid $700 portation
ID: 2556041 • Letter: R
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r phot equipment. In addition to the purchase price, Griffin paid $700 portation charges, $100 insurance for the equipment whin $12,100 sales tax, and $3,100 for specialized training to be able the equipment. Griffin estimates that the equipment will remain vice 5 years and have a residual value of $20,000. T produce 50,000 photos the first year, with annual production decreas by 5,000 photos during each of the next four years (that is, 45,000 tos in year 2 40,000 in year 3, and so on--a total of 200,000 photosj, trying to decide which depreciation method to use, Griffin has requested a depreciation schedule for each of three depreciation methods (straight line, units-of-production, and double-declining-balance). 0-38B On January 3, 2007, Joe Griffin Photography paid $224,000 for to use In Ser- he equipment should ing Requirements 1. For each depreciation method, prepare a depreciation schedule show- ing asset cost, depreciation expense, accumulated depreciation, and asset book value. (pp. 512-514) 2. Griffin prepares financial statements using the depreciation method that reports the highest income in the early years. For income tax purposes, the company uses the method that minimizes income taxes in the early years. Consider the first year of using the equipment. Identify the depreciation methods that meet Griffin's objectivers, assuming the income tax authorities permit the use of any of the methods. (pp. 515, 518-519)Explanation / Answer
Cost of the Equipment 224,000 Transportation cost 700 Insurance 100 Sales Tax 12,100 Total cost of Asset 236,900 Please note that Training cost is not included in the Cost of Asset because training costs is incurred on resources using the equipment and not on the equipment to make it use. 1) Straight Line Method Cost of Asset 236,900 Life of Asset 5 Residual Value 20,000 Depreciation per year 43,380 Year Asset Cost Depreciation cost Asset book Value Accumulated Depreciation 2007 236,900 43,380 193,520 43,380 2008 193,520 43,380 150,140 86,760 2009 150,140 43,380 106,760 130,140 2010 106,760 43,380 63,380 173,520 2011 63,380 43,380 20,000 216,900 Units of Production Method No. of photos to be produced in each year 2007 50,000 2008 45,000 2009 40,000 2010 35,000 2011 30,000 Total Photos 200,000 Cost of Asset 236,900 No. of photos for Life 200,000 Residual Value 20,000 Depreciation per photo 1.08 Year Asset Cost Depreciation cost Asset book Value Accumulated Depreciation 2007 236,900 54,225 182,675 54,225 2008 182,675 48,803 133,873 103,028 2009 133,873 43,380 90,493 146,408 2010 90,493 37,958 52,535 184,365 2011 52,535 32,535 20,000 216,900 Double Declining Balance Cost of Asset 236900 Life of Asset 5 Residual Value 20000 Depreciation per year 43380 Depreciation Rate 20% Double Declining Rate 40% Year Asset Cost Depreciation cost Asset book Value Accumulated Depreciation 2007 236,900 94,760 142,140 94,760 2008 142,140 56,856 85,284 151,616 2009 85,284 34,114 51,170 185,730 2010 51,170 20,468 30,702 206,198 2011 30,702 10,702 20,000 216,900 2) Considering the first year Depreciation to be recorded by each method: For Financial Statements Griffin can use Straight line method as the depreciation per year is $43,380 and this would give higher Income For Income Tax purpose Griffin can use Double Declining Method as the deprecation is $94,760 for the first year and this would reduce the Income tax payable in first year as required by Griffin.
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