On January 2, 2018, Brown Company paid $280,000 for a computer system. In addition to the basic purchase price, the company paid a setup fee of $1,900, sales tax of $7,000, and $28,600 for a special platform on which to place the computer. Brown's management estimates that the computer will remain in service for five years and have a residual value of $35,500. The computer will process 25,000 documents the first year, with annual processing decreasing by 2,500 documents during each of the next four years (that is, 22,500 documents in 2019; 20,000 documents in 2020; and so on). For help with deciding which depreciation method to use, the company president has requested a depreciation schedule for each of the three depreciation methods. If rounding is necessary, use two decimal places for the depreciation amount per document. Read the requirements. Requirement 1. For each of the generally accepted depreciation methods, prepare a depreciation schedule showing asset cost, depreciation expense, accumulated depreciation, and asset book value. Complete the straight-line depreciation schedule. Begin by filling out the schedule through 2019, and then complete the schedule by entering the amounts through 2022. (Enter the rate to two decimal places.) Straight-Line Depreciation Schedule Depreciable Yearly Rate Cost Expense Accumulated Depreciation Date Cost Book Value January 2, 2018 December 31, 2018 December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 Complete the units-of-production depreciation schedule. Begin by filling out the schedule through 2019, and then complete the schedule by entering the amounts through 2022. (Enter depreciation per unit to the nearest cent.) Complete the units-of-production depreciation schedule. Begin by filling out the schedule through 2019, and then complete the schedule by entering the amounts through 2022. (Enter depreciation per unit to the nearest cent.) Units-of-Production Depreciation Schedule Depreciation Rate per Unit Number of Units Yearly Expense Accumulated Depreciation Date Cost Book Value January 2, 2018 December 31, 2018 December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 Complete the double-declining-balance depreciation schedule. Begin by filling out the schedule through 2019, and then complete the schedule by entering the amounts through 2022. (Enter the rate to two decimal places. Round all other amounts to the nearest whole dollar.) Double-Declining-Balance (DDB) Depreciation Schedule Date Double-Declining-Balance (DDB) Depreciation Schedule DDB Yearly Accumulated Cost Rate Expense Depreciation January 2, 2018 L December 31, 2018 Book Value December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 Requirement 2. For financial reporting purposes, Brown uses the depreciation method that maximizes reported income in the early years of an asset's use. For income tax purposes, the company uses the depreciation method that minimizes income tax payments in those early years. Consider the first year Brown Co. uses the computer. Identify the depreciation methods that meet Brown's objectives, assuming the income tax authorities permit the use of any of the methods. method, which produces the depreciation for that year. The method that minimizes income taxes in The depreciation method that maximizes reported net income in the first year of the computer's life is the the first year is the V method, which produces the depreciation amount for that year. Requirement 3. Net cash provided by operations before income tax is $150,000 for the computer's first year. The company's income tax rate is 32%. For the two depreciation methods identified in requirement 2, compare the net income and net cash provided by operations (cash flow). Show which method gives the net income advantage and which method gives the cash flow advantage. Begin by comparing the net income. Show which method gives the net-income advantage. Depreciation Method that in the Early Years Maximizes Reported Minimizes Income Tax Payments Income Net income for first year: Net cash provided by operations before income tax Depreciation expense Income before income tax Income tax expense Net income Net income advantage of method that maximizes reported income Finally, compare the cash flows. Show which method gives the cash-flow advantage. Depreciation Method that in the Early Years Maximizes Reported Minimizes Income Income Tax Payments Depreciation Method that in the Early Years Maximizes Reported Minimizes Income Income Tax Payments Net cash flow analysis for first year: Net cash provided by operations before income tax Income tax expense Cash provided by operations (cash flow) Cash flow advantage of method that minimizes income tax payments On January 2, 2018, Brown Company paid $280,000 for a computer system. In addition to the basic purchase price, the company paid a setup fee of $1,900, sales tax of $7,000, and $28,600 for a special platform on which to place the computer. Brown's management estimates that the computer will remain in service for five years and have a residual value of $35,500. The computer will process 25,000 documents the first year, with annual processing decreasing by 2,500 documents during each of the next four years (that is, 22,500 documents in 2019; 20,000 documents in 2020; and so on). For help with deciding which depreciation method to use, the company president has requested a depreciation schedule for each of the three depreciation methods. If rounding is necessary, use two decimal places for the depreciation amount per document. Read the requirements. Requirement 1. For each of the generally accepted depreciation methods, prepare a depreciation schedule showing asset cost, depreciation expense, accumulated depreciation, and asset book value. Complete the straight-line depreciation schedule. Begin by filling out the schedule through 2019, and then complete the schedule by entering the amounts through 2022. (Enter the rate to two decimal places.) Straight-Line Depreciation Schedule Depreciable Yearly Rate Cost Expense Accumulated Depreciation Date Cost Book Value January 2, 2018 December 31, 2018 December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 Complete the units-of-production depreciation schedule. Begin by filling out the schedule through 2019, and then complete the schedule by entering the amounts through 2022. (Enter depreciation per unit to the nearest cent.) Complete the units-of-production depreciation schedule. Begin by filling out the schedule through 2019, and then complete the schedule by entering the amounts through 2022. (Enter depreciation per unit to the nearest cent.) Units-of-Production Depreciation Schedule Depreciation Rate per Unit Number of Units Yearly Expense Accumulated Depreciation Date Cost Book Value January 2, 2018 December 31, 2018 December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 Complete the double-declining-balance depreciation schedule. Begin by filling out the schedule through 2019, and then complete the schedule by entering the amounts through 2022. (Enter the rate to two decimal places. Round all other amounts to the nearest whole dollar.) Double-Declining-Balance (DDB) Depreciation Schedule Date Double-Declining-Balance (DDB) Depreciation Schedule DDB Yearly Accumulated Cost Rate Expense Depreciation January 2, 2018 L December 31, 2018 Book Value December 31, 2019 December 31, 2020 December 31, 2021 December 31, 2022 Requirement 2. For financial reporting purposes, Brown uses the depreciation method that maximizes reported income in the early years of an asset's use. For income tax purposes, the company uses the depreciation method that minimizes income tax payments in those early years. Consider the first year Brown Co. uses the computer. Identify the depreciation methods that meet Brown's objectives, assuming the income tax authorities permit the use of any of the methods. method, which produces the depreciation for that year. The method that minimizes income taxes in The depreciation method that maximizes reported net income in the first year of the computer's life is the the first year is the V method, which produces the depreciation amount for that year. Requirement 3. Net cash provided by operations before income tax is $150,000 for the computer's first year. The company's income tax rate is 32%. For the two depreciation methods identified in requirement 2, compare the net income and net cash provided by operations (cash flow). Show which method gives the net income advantage and which method gives the cash flow advantage. Begin by comparing the net income. Show which method gives the net-income advantage. Depreciation Method that in the Early Years Maximizes Reported Minimizes Income Tax Payments Income Net income for first year: Net cash provided by operations before income tax Depreciation expense Income before income tax Income tax expense Net income Net income advantage of method that maximizes reported income Finally, compare the cash flows. Show which method gives the cash-flow advantage. Depreciation Method that in the Early Years Maximizes Reported Minimizes Income Income Tax Payments Depreciation Method that in the Early Years Maximizes Reported Minimizes Income Income Tax Payments Net cash flow analysis for first year: Net cash provided by operations before income tax Income tax expense Cash provided by operations (cash flow) Cash flow advantage of method that minimizes income tax payments