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Part 1

On

January 6,

2021,

Outtahe

Company paid

$264,000

for a computer system. In addition to the basic purchase price, the company paid a setup fee of

$1,000,

sales tax of

$7,000,

and

$28,000

for a special platform on which to place the computer.

Outtahe's

management estimates that the computer will remain in service for five years and have a residual value of

$30,000.

The computer will process

35,000

documents the first year, with annual processing decreasing by

2,500

documents during each of the next four years (that is,

32,500

documents in

2022;

30,000

documents in

2023;

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

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Part 1

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

2022,

and then complete the schedule by entering the amounts through

2025.

(Enter the rate to two decimal places.)

Straight-Line Depreciation Schedule
Date	Cost	Rate	Depreciable Cost	Yearly Expense	Accumulated Depreciation	Book Value
January 6, 2021	$300,000					$300,000
December 31, 2021		0.20	$270,000	$54,000	$54,000	246,000
December 31, 2022		0.20	270,000	54,000	108,000	192,000

Part 2

December 31, 2023		0.20	270,000	54,000	162,000	138,000
December 31, 2024		0.20	270,000	54,000	216,000	84,000
December 31, 2025		0.20	270,000	54,000	270,000	30,000

Part 3

Complete the units-of-production depreciation schedule. Begin by filling out the schedule through

2022,

and then complete the schedule by entering the amounts through

2025.

(Enter depreciation per unit to the nearest cent.)

Units-of-Production Depreciation Schedule
Date	Cost	Depreciation Rate per Unit	Number of Units	Yearly Expense	Accumulated Depreciation	Book Value
January 6, 2021	$300,000					$300,000
December 31, 2021		1.80	35,000	$63,000	$63,000	237,000
December 31, 2022		1.80	32,500	58,500	121,500	178,500

Part 4

December 31, 2023		1.80	30,000	54,000	175,500	124,500
December 31, 2024		1.80	27,500	49,500	225,000	75,000
December 31, 2025		1.80	25,000	45,000	270,000	30,000

Part 5

Complete the double-declining-balance depreciation schedule. Begin by filling out the schedule through

2022,

and then complete the schedule by entering the amounts through

2025.

(Enter the rate to two decimal places. Round all other amounts to the nearest whole dollar.)

Double-Declining-Balance (DDB) Depreciation Schedule
Date	Cost	DDB Rate	Yearly Expense	Accumulated Depreciation	Book Value
January 6, 2021	$300,000				$300,000
December 31, 2021		0.40	$120,000	$120,000	180,000
December 31, 2022		0.40	72,000	192,000	108,000

Part 6

December 31, 2023		0.40	43,200	235,200	64,800
December 31, 2024		0.40	25,920	261,120	38,880
December 31, 2025			8,880	270,000	30,000

Part 7

Requirement 2. For financial reporting purposes,

Outtahe

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

Outtahe

Co. uses the computer. Identify the depreciation methods that meet

Outtahe's

objectives, assuming the income tax authorities permit the use of any of the methods. The depreciation method that maximizes reported net income in the first year of the computer's life is the

straight-line

method,

which produces the

lowest

depreciation for that year. The method that minimizes income taxes in the first year is the

double-declining-balance

method, which produces the

highest

depreciation amount for that year.

Part 8

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

35%.

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
		Income	Tax Payments
Net income for first year:
	Net cash provided by operations before income tax	$150,000	$150,000
	Depreciation expense	54,000	120,000
	Income before income tax	96,000	30,000
	Income tax expense
	Net income
	Net income advantage of method that
	maximizes reported income

Requirements

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1.	For each of the generally accepted depreciation methods, prepare a depreciation schedule showing asset cost, depreciation expense, accumulated depreciation, and asset book value.
2.	For financial reporting purposes, Outtahe 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 Outtahe Co. uses the computer. Identify the depreciation methods that meet Outtahe's objectives, assuming the income tax authorities permit the use of any of the methods.
3.	Net cash provided by operations before income tax is $150,000 for the computer's first year. Thecompany's income tax rate is 35%. 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.