Kimberly Sisters purchased equipment for $80,000 on January 1, 2014. Kimberly can use the double-declining-balance method for
Question:
Kimberly Sisters purchased equipment for $80,000 on January 1, 2014. Kimberly can use the double-declining-balance method for tax purposes but does not understand why it should be preferred over straight-line. The following information is available:
Estimated useful life ..................... 4 years
Estimated salvage value ...................$ 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?
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...
Step by Step Answer:
a Every depreciation method depreciates the same amount over the useful life of a fixed asset Depreciation methods only vary the timing of depreciation charges Therefore both the straightline method a...View the full answer
