P10-4 Calculating depreciation by three methods and the advantage of accelerateddepreciation for tax purposes [20–30 min]On 3 January 2017, Joe Campbell Photography paid $224 000 for photo equipment. In additionto the purchase price, Campbell paid $700 freight charges, $100 insurance for the equipmentwhile in transit, $12 100 customs duty, and $3100 for specialised training to be able to use theequipment. Campbell estimates that the equipment will remain in service for five years andhave a residual value of $20000. The equipment should produce 50000 photos the first year,with annual production decreasing by 5000 photos during each of the next four years (thatis, 45 000 photos in year 2, 40000 in year 3 and so on-a total of 200 000 photos). In trying todecide which depreciation method to use, Campbell has requested a depreciation schedule foreach of three depreciation methods (straight line, units of production and reducing balance).Requirements1 For each depreciation method, prepare a depreciation schedule showing asset cost,depreciation expense, accumulated depreciation and asset carrying amount. For thereducing-balance method, use a depreciation rate based on:20 000RB rate:1%3D10.6080.392%3D240 0002 Campbell prepares financial statements using the depreciation method that reports thehighest profit in the early years. For income tax purposes, the firm uses the method thatminimises income taxes in the early years. Consider the first year of using the equipment.Identify the depreciation methods that meet Campbell's objectives, assuming that theincome tax authorities permit the use of any of the methods.

Solution:- Given, On 3 January 2017, Joe Campbell photography paid $224,000 for photo equipment.…

Requirements 1 For each depreciation method, prepare a depreciation schedule showing asset cost, depreciation expense, accumulated depreciation and asset carrying amount. For the reducing-balance method, use a depreciation rate based on: 20 000 RB rate: 1 1 0.608 0.392 = |240 000 2 Campbell prepares financial statements using the depreciation method that reports the highest profit in the early years. For income tax purposes, the firm uses the method that minimises income taxes in the early years. Consider the first year of using the equipment. Identify the depreciation methods that meet Campbell's objectives, assuming that the income tax authorities permit the use of any of the methods.

Requirements 1 For each depreciation method, prepare a depreciation schedule showing asset cost, depreciation expense, accumulated depreciation and asset carrying amount. For the reducing-balance method, use a depreciation rate based on: 20 000 RB rate: 1 1 0.608 0.392 = |240 000 2 Campbell prepares financial statements using the depreciation method that reports the highest profit in the early years. For income tax purposes, the firm uses the method that minimises income taxes in the early years. Consider the first year of using the equipment. Identify the depreciation methods that meet Campbell's objectives, assuming that the income tax authorities permit the use of any of the methods.

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter10: Project Cash Flows And Risk

Section: Chapter Questions

Problem 1PROB

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