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 $8,173,500. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $90,290.

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?

Part B:

9

Year 200% Declining-Balance (Half-Year Convention) 1 $1,021,688 2 1,787,953 3 1,340,965 4 1,005,724 5 754,293 6 565,719 7 8

9

Explanation / Answer

Straight -line (Half-year convention) Year (8173500-90290)/8 1 505201 2 1010401 3 1010401 4 1010401 5 1010401 6 1010401 7 1010401 8 1010401 9 505201 Year 200% Declining-Balance (Half-Year Convention) (100/8=12.5*2=25%) Book value 1 1021687.50 7151812.50 2 1787953.13 5363859.38 3 1340964.84 4022894.53 4 1005723.63 3017170.90 5 754292.72 2262878.17 6 565719.54 1697158.63 7 535622.88 (1697158.63-90,290)/3 = 535622.88 Straight-Line Depreciation Expense. 8 535622.88 Since straight-line depreciation now yields a higher depreciation expense, it will be used for this year and the next two 9 535622.88 Depriciation for first two years 1515602 2809641 Highest net income would be from using straight line method of depriciation as it is lower than declining balance

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