Comprehensive Problem #5

Drahus & Fortuna Sporting Goods and Accounting Company are discussing the idea of purchasing new equipment. The co-presidents of the company (Brock & Justin) are trying to convince the bank to loan the business the money to purchase new equipment. The bank has a new loan officer (who must have graduated from a university other than Alvernia) who doesnt understand how the business will recoup the money over an extended period of time. The loan officer believes that Drahus & Fortuna are creating a scam by using some creative accounting terms when they talk about DEPRECIATION.

Brock & Justin have asked you, the newly hired depreciation expert to develop depreciation values based on several different depreciation methods. You offer to help knowing full well that Excel can do them for you in an hour and the co-presidents have given you a week to work on the depreciation project. A quick fix and its off to the Florida Keys!

The following data has been provided:

Price Useful Life Salvage Value

Automatic ski sharpening equipment $50,000 5 years $5,000

Copier machine for accounting division $40,000 4 years $4,000

RESTORED AMC Gremlin for President $25,000 7 years $2,500

Prepare a schedule demonstrating annual depreciation costs for Straight line, Double-Declining Balance and Sum of the Years Digits for three years.

Prepare a report showing the calculations and a complete explanation about the benefits of each depreciation method in recouping the cost of equipment and the impact on taxes.