P7-74B (Learning Objectives 1, 2,3: Computing deprecaton by three methods; ident
ID: 2527509 • Letter: P
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P7-74B (Learning Objectives 1, 2,3: Computing deprecaton by three methods; identifying the cash flow advantage of accelerated depreciation for tax purpases) On January 6, 20x6 ?.?. Scott Co. paid €245,000 for acomputer system. In addition to the basic purchase price the company paid a setup fee of EB00, E6,400 sales tax, and 27,800 for a special platform on which to place the computer. K.P. Scott management estimates that the computer will remain in service for five years and have a residual value of 20,000. The computer will process 45,000 documents the first year, with annual processing decreasing by 2,500 documents during each of the next four years (that is, 42,500 documents in 20X7; 40,000 documents in 20X08 and soon). In trying to decide which depreciation method to use, the company resident has requested a depreciation schedule for each of the three depreciation methods (straight-line, units-of production, and double-declining balance) I Requirements 1. For each othe generally accepted depreciation methods, prepare a depreciation schedul showing asset cost, depreciation expense, accumulated depreciation, and asset book value 2. KP. Scott reports to shareholders and creditors in the financial statements using the depreciation method that maximizes reported income in the early years of asset use. For income tax purposes, the company uses the depreciation method that minimizes income ax payments in those early years Consider the first year K.P. Scott Co. uses the computer Identify the depreciation methods that meet Scat's objectives, assuming the income tax authorities permit the use of any of the methodsExplanation / Answer
Answer 1. Cost of Computer = 245,000 + 800 + 6,4000 + 27,800 = 280,000 Straight Line Method. Depreciation per Annum = ($280,000 - $20,000) / 5 Years = 52,000 per annum Year Book Value Beginning Depreciation Accumulated depreciation Book Value Ending 0 - - - 280,000.00 1 280,000.00 52,000.00 52,000.00 228,000.00 2 228,000.00 52,000.00 104,000.00 176,000.00 3 176,000.00 52,000.00 156,000.00 124,000.00 4 124,000.00 52,000.00 208,000.00 72,000.00 5 72,000.00 52,000.00 260,000.00 20,000.00 Double Declining Method Rate of Dep. Under DDBM = 2 X Rate Under Straight Line Method Rate of Dep. Under DDBM = 2 X 20% = 40% Year Book Value Beginning Depreciation Accumulated depreciation Book Value Ending 0 - - - 280,000.00 1 280,000.00 112,000.00 112,000.00 168,000.00 2 168,000.00 67,200.00 179,200.00 100,800.00 3 100,800.00 40,320.00 219,520.00 60,480.00 4 60,480.00 24,192.00 243,712.00 36,288.00 5 36,288.00 14,515.20 258,227.20 21,772.80 Units of Production method Depreciation per Document = 260,000 / 200,000 Documents = 1.30 per Document Year Book Value Beginning Documents Processed Depreciation = Doc. Processed X 1.30 Accumulated depreciation Book Value Ending 0 - - - - 280,000.00 1 280,000.00 45,000.00 58,500.00 58,500.00 221,500.00 2 221,500.00 42,500.00 55,250.00 113,750.00 166,250.00 3 166,250.00 40,000.00 52,000.00 165,750.00 114,250.00 4 114,250.00 37,500.00 48,750.00 214,500.00 65,500.00 5 65,500.00 35,000.00 45,500.00 260,000.00 20,000.00 Answer 2. Depreciation Method - Minimizes Income Tax Payments in early years - Double Declining Balance Method Depreciation Method - Maximize Income in early years - Straight Line Method
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