On August 3, Cinco Construction purchased special-purpose equipment at a cost of

Question

On August 3, Cinco Construction purchased special-purpose equipment at a cost of $6,420,400. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $45,990.

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

b. Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the 200 percent declining-balance method (half-year convention) with a switch to straight-line when it will maximize depreciation expense.

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’s use?

Explanation / Answer

As per question we have,

Cost = $6420400

Residual value = $45990

Useful life = 8 years

So,

Actual depriciable cost = 6420400-45990 = $6374410.

Deprication per Financial year = 6374410/8 = $796801.25

Again since its half yearly so per half year we will charge,

= 796801.25/2 = $398400.625.

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