May Manufacturing Company was organized January2, 2013. During 2013, it has used in its reports to management the straight-line method of depreciating its plant assets. On November 9, you are having a conference with May's officers to discuss the depreciation method to be used for income tax and shareholder reporting. May's president has suggested the use of a new method, which he feels is more suitable than the straight-line method for the company's needs during the period of rapid expansion of production and capacity that he foresees. The following is a schedule in which the proposed method is applied to a fixed asset with an original cost of $32,000, an estimated useful life of 5 years, and a scrap value of approximately $2,000.

The president favors the new method because he has heard that:
1. It will increase the funds recovered during the years near the end of the asset's useful life when maintenance and replacement disbursements are high.
2. It will result in increased write-offs in later years, thereby reducing taxes.
Required:
1. Explain the purpose and, hence, the nature of accounting for depreciation.
2. Is the president's proposal within the scope of generally accepted accounting principles? In making your decision, explain the circumstances, if any, under which the method would be reasonable and those, if any, under which it would not be reasonable.
3. The president wants your advice.
a. Explain whether depreciation recovers or creates funds.
b. Assume that the Internal Revenue Service accepts the proposed depreciation method in this particular case. If the proposed method were used for shareholder and tax reporting purposes, explain how it would affect the availability of funds generated by operations.

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Years Accumulated Book of Life Fraction Depreciation Depreciation, Value at Year-End Year-End Year Used Rate 1/15 2/15 3/15 4/15 5/15 Expense $ 2,000 4,000 6,000 8,000 10,000 $ 2,000 6,000 12,000 20,000 30,000 $30,000 26,000 20,000 12,000 2,000