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Rochelle Browne is CFO of Western Resources, Inc. The company specializes in the exploration and development of natural gas. On January 2 of the
Rochelle Browne is CFO of Western Resources, Inc. The company specializes in the exploration and development of natural gas. On January 2 of the current year, the company purchased equipment for $10,500,000. The company's standard practice for equipment like this is to use straight-line depreciation over 12 years using an estimated residual value of $1,500,000. Rochelle is considering several alternative options to the standard depreciation practice. Each of these options are independent. Option 1: Adjust the estimated service life of the equipment from 12 years to 6 years. Option 2: Adjust the estimated residual value of the equipment from $1,500,000 to $0. Option 3: Adjust the estimated service life of the equipment to 6 years and adjust the estimated residual value to $0. Required: Write a brief memo to Rochelle Browne. In your memo include the following: a. The annual depreciation using the company's standard practice. b. The annual depreciation for each of the three options described above. c. Identify whether each of the three options would increase or decrease the current year's net income as compared to the company's standard practice. d. Make a recommendation as to which method the company should choose if the goal is to maximize net income for the current year.
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