Determining Tax Savings The president of Southeast Company anticipates rapid expansion in business in each of the next several years and is interested in reducing tax payments in 2000 and 2001 as much as possible. Southeast is currently using straight-line depreciation for both financial reporting and tax purposes. At the beginning of 2000, Southeast holds depreciable assets that cost $900,000 and have an expected salvage value of $60,000. The average life of the assets is expected to be six years from January 1, 2000.

Southeast’s income tax rate is 40 percent.

In 2000 and 2001, Southeast projects that it will report sales of $1,400,000 and $1,700,000, and expenses other than depreciation and income tax of $800,000 and $1,000,000, respectively.

a. Compute the amount of expected net income for 2000 and 2001 using straight-line depreciation.

b. Compute the amount of expected net income for 2000 and 2001 using double-declining-balance depreciation.

c. If Southeast were to use double-declining-balance rather than straight-line depreciation for income tax purposes, what amount of cash savings would it expect to realize in each of the two years?

d. Would Southeast be wise to use double-declining-balance depreciation for tax purposes if there was a chance that it would report an operating loss in one or both of the years?

Explain.