Kimberly Sisters purchase equipment for $80,000 on January 1, 2011. Kimberly can use the double-declining-balance method for

Question:

Kimberly Sisters purchase equipment for $80,000 on January 1, 2011. Kimberly can use the double-declining-balance method for tax purposes but does not understand why it should be preferred over straight-line. The following information is available:

Estimated useful life.........................4 years

Estimated salvage value........................$20,000

Expected revenues over each of the next four years............$100,000

Expected expenses (excluding depreciation) over each of the

Next four years............................$60,000

Tax rate (percent of net income)...................35 percent

REQUIRED:

a. Which of the two methods will give rise to the greater amount of depreciation over the life of the equipment? Support your answer with computations.

b. Which of the two methods will result in the payment of less taxes over the life of the equipment? Support your answer with computations.

c. Why is the double-declining-balance method preferred for tax purposes?

d. Assume a discount rate of 10 percent. How much money would be saved by using double-declining-balance instead of straight-line?

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