On January 3, 19X1, Domenici Corporation paid \(\$ 192,000\) for equipment used in manufacturing automotive supplies. In addition to the basic purchase price, the company paid \(\$ 700\) transportation charges, \(\$ 100\) insurance for the goods in transit, \(\$ 4,100\) sales tax, and \(\$ 3,100\) for a special platform on which to place the equipment in the plant. Domenici management estimates that the equipment will remain in service five years and have a residual value of \(\$ 20,000\). The equipment will produce 50,000 units the first year, with annual production decreasing by 5,000 units during each of the next four years (that is, 45,000 units in year \(2 ; 40,000\) units in year 3 ; and so on). In trying to decide which depreciation method to use, Alfonse Domenici has requested a depreciation schedule for each of the four generally accepted depreciation methods (straightline, units-of-production, double-declining-balance, and sum-of-years'-digits).

\section*{Required}

1. For each of the four generally accepted depreciation methods, prepare a depreciation schedule showing asset cost, depreciation expense, accumulated depreciation, and asset book value. Use the format of Exhibits \(10-4\) through 10-7.

2. Domenici reports to stockholders and creditors in the financial statements using the depreciation method that maximizes reported income in the early years of asset use. For income tax purposes, however, the company uses the depreciation method that minimizes income tax payments in those early years. Consider the first year Domenici uses the equipment. Identify the depreciation methods that meet Domenici's objectives, assuming the income tax authorities would permit the use of any of the methods.

3. Assume that cash provided by operations before income tax is \(\$ 180,000\) for the equipment's first year. The combined federal and state income tax rate is 40 percent. For the two depreciation methods identified in Requirement 2, compare the net income and cash provided by operations (cash flow). Use the format of Exhibit 10-10 for your answer. Show which method gives the net-income advantage and which method gives the cash-flow advantage. Ignore the earnings rate in the cash-flow analysis.