A firm purchases an asset for $10,000,000. Management forecasts that the asset will have an expected life of ten years and a salvage value of 5 percent. What are the financial statement effects from recording depreciation for this asset in the first two years of its life if financial reporting depreciation is recorded under

(a) the straightline method, and

(b) the double-declining balance method? As a financial analyst, what questions would you raise with the firm’s CFO about its depreciation policy?

AppendixLO1