Question
Consider two hypothetical companies: A and B. At the beginning of year 1, each company buys an identical piece of equipment for 2,100. The two
Consider two hypothetical companies: A and B. At the beginning of year 1, each company buys an identical piece of equipment for 2,100. The two companies have the same assumptions about the equipment useful life, estimated residual value, and productive capacity. The annual production of each company is the same. However, each company uses a different method of depreciation. As disclosed in each companys notes to the financial statements, each companys depreciation method, assumptions, and production are as follows: Estimated residual value: 100 Estimated useful life: 5 years Depreciation methods: Company A: straight-line method Company B: accelerated method (assume that 50% of the depreciable amount is depreciated in year 1, and the remaining balance is depreciated equally during the subsequent years)
a) Calculate, for each company, the beginning and ending net book value, the annual depreciation expense, and accumulated year-end depreciation for the equipment throughout its useful life.
b) Critically discuss the differences in the timing of the recognition of the depreciation expense for each method. Under what circumstances do you think a manager could choose to use the accelerated depreciation method?
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