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 Subject: fiinicial accounting Category: Business and Money > Accounting Asked by: browngirl888-ga List Price: \$20.00 Posted: 19 Aug 2005 08:28 PDT Expires: 18 Sep 2005 08:28 PDT Question ID: 557692
 ```Balls and Bats purchased equipment on January 1, 2005 at a cost of \$100,000. The estimated useful life is 4 years with a salvage value of \$10,000. Prepare two different depreciation schedules for the equipment ? one using the double-declining balance method, and the other using the straight-line method. (Round to the nearest dollar). Determine which method would result in the greatest net income for the year ending December 31, 2005. How would taxes affect management?s choice between these two methods for the financial statements? I need by 8/23/95 please```
 ```Browngirl888 ? We?ll start with straight-line depreciation, as the double-declining balance is based upon it. But there?s an important disclaimer here: we assume that we know the salvage value at the end ? so it reduces the depreciable amount by \$10,000. More often real-world finance problems assume no salvage value ? because it?s so hard to predict. Then tooling is depreciated over its expected life ? and any salvage value simply comes back in the last year. And another disclaimer: the IRS has a half-year convention for equipment put in place ? but since we?re using the full-year in this problem, we?ll ignore that too. STRAIGHT-LINE DEPRECIATION ============================= \$90,000 over 4 years, so it?s 25% per year ? and I?ve bracketed them as negative numbers. 2005: (\$22,500) 2006: (\$22,500) 2007: (\$22,500) 2008: (\$22,500) DOUBLE-DECLINING BALANCE ========================== Double-declining balance doubles the remaining depreciation each year ? until the point that it is less than straight-line, then it reverts to straight-line for the balance of the asset. About.com ?Double declining balance depreciation method? http://beginnersinvest.about.com/cs/investinglessons/l/bldbldeclinebal.htm So, 2005 is \$90,000 * 0.50 = (\$45,000). This leaves \$45,000 left to be depreciated in future years. 2006 is 0.50 * \$45,000 = (\$22,500). This leaves \$22,500 left to be depreciated in future years. 2007 is 0.50 * \$22,500 ? but that?s now less than straight line of (\$22,500) ? so we?ll take the full balance this year. 2008: no depreciation ----- IMPACT ON NET INCOME: Obviously the double-declining balance reduces net income. But remember what these depreciation amounts are: they?re estimates of the value of an investment. Accelerated depreciation methods like double-declining balance or MACRS (used in current IRS calculations) are tax allowances meant more to stimulate investment than reflect equipment wear-and-tear. And most importantly, depreciation doesn?t use cash ? it just reduces earnings on paper. IMPACT OF TAXES: Taxes DO reduce cash in the bank. That reduces money available for bonuses to managers or to pay shareholders in dividends. So, in any tax situation, faster depreciation actually increases the amount of cash available by reducing taxes. At current U.S. tax rates, with a maximum tax rate of 35%, choosing double-declining balance would save Balls and Bats \$7,875 in taxes for 2005, money that can be reinvested or returned as dividends or bonuses. Google search strategy: ?double declining balance? depreciation Best regards, Omnivorous-GA```
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