r phot equipment. In addition to the purchase price, Griffin paid $700 portation

Question

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 an photo equipment ($) Cost 2,24,000 Transportation 700 Insurance 100 Sales tax 12,100 Training 3,100 2,40,000 Useful life 5 years Residual Value 20,000 Depreciable Value 2,20,000 (2,40,000-20,000) 1. SLM Method Depreciation/year 44,000 ($ 2,40,000/5 years) Asset cost 2,40,000 Year Depreciation expense Accumulated Depreciation Asset Book value 1 44,000 44,000 1,96,000 2 44,000 88,000 1,52,000 3 44,000 1,32,000 1,08,000 4 44,000 1,76,000 64,000 5 44,000 2,20,000 20,000 2. Units of Production Year Production Depreciation Accumulated Depreciation Asset Book value 1 50000 55,000 55,000 1,85,000 2 45000 49,500 1,04,500 1,35,500 3 40000 44,000 1,48,500 91,500 4 35000 38,500 1,87,000 53,000 5 30000 33,000 2,20,000 20,000 2,00,000 2,20,000 3.Double Declining Balance Depreciation Year Net book value, beginning of year Double-declining balance depreciation computed as 2 × SL rate (20% ) × beginning NBV Accumlated depreciation Net book value, end of year 1 2,40,000 96,000 96,000 1,44,000 2 1,44,000 57,600 1,53,600 86,400 3 86,400 34,560 1,88,160 51,840 4 51,840 20,736 2,08,896 31,104 5 31,104 11,104 2,20,000 20,000 Analysis : For Financial statement purpose, Griffin would use Straight line depreciation method. Because depreciation is lower than other method in earlier years and it would impact high income in financial statement.                               For tax purpose, Griffin will use double declining method. Because it would show lower income than other methods and save taxes of company.

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