On January 3, 2007, Joe Griffin Photography paid $224,000 for photo equipment. I

Question

On January 3, 2007, Joe Griffin Photography paid $224,000 for photo equipment. In addition to the purchase price, Griffin paid $700 transportation charges, $100 insurance for the equipment while in transit, $12,100 sales tax, and $3,100 for specialized training to be able to use the equipment. Griffin estimates that the equipment will remain in service 5 years and have a residual value of $20,000. The equipment should produce 50,000 photos the first year, with annual production decreasing by 5,000 photos during each of the next four years(that is, 45,000) photos in year 2; 40,000 in year 3; and so on - a total of 200,000 photos). In 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). Requirements 1. For each depreciation method, prepare a depreciation schedule showing 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 objectives, assuming the income tax authorities permit the use of any of the methods. (pp. 515, 518 - 519)

Explanation / Answer

Solution.

A. Straight line method .

B. Unit method .

C. Double decline Method.

Cost of machine Cash price          224,000 Transportation                  700 Insurance                  100 Sales tax            12,100 Trainninng Cost              3,100 Total Cost          240,000

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