The Lewis Company acquired a large, highly-automated machine for $3,000,000 on February 28, 2016. It is estimated that this machine will have an eight-year useful life and a residual value of $120,000. Assume the Lewis Company uses the straight-line method of depreciation and sells the machine to the Smith Company on November 30, 2019. Answer the following two questions: What amount will Smith capitalize for this machine on it’s purchase? Assume Lewis reported a gain on the sale. If Lewis had been on the DDB method instead of the straight-line method, what would have resulted? (Place one checkmark indicating which of the following would have resulted): Reported Larger Gain Reported Smaller Gain Whether the Reported Gain is Larger or Smaller Cannot Be Determined Assume that the company is using the straight-line method of depreciation. If this equipment is sold on August 31, 2020 for $2,000,000, what will be reported on the income statement for calendar year 2020 for this transaction. The relevant tax rate for this transaction is 30%. Be sure to specify the amounts (in thousands), titles and locations of all related impacts. Indicate in each case if impact is positive (+) or negative (-). Hint: Compare amount received with book value on date of sale. Calculations | Inclusion On 2020 Income Statement | | Operations Section: | | | | | | | Other Items Section: | | | | | Ordinary Inc. Before & Aft. Taxes: | | Ordinary Inc Before Tax | | Tax Expense _________ | | Ordinary Inc After Tax | | | Below-The-Line Section: | | Net Income
The Lewis Company acquired a large, highly-automated machine for $3,000,000 on February 28, 2016. It is estimated that this machine will have an eight-year useful life and a residual value of $120,000.
Assume the Lewis Company uses the straight-line method of
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What amount will Smith capitalize for this machine on it’s purchase?
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Assume Lewis reported a gain on the sale. If Lewis had been on the DDB method instead of the straight-line method, what would have resulted? (Place one checkmark indicating which of the following would have resulted): |
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Reported Larger Gain |
Reported Smaller Gain |
Whether the Reported Gain is Larger or Smaller Cannot Be Determined |
Assume that the company is using the straight-line method of depreciation. If this equipment is sold on August 31, 2020 for $2,000,000, what will be reported on the income statement for calendar year 2020 for this transaction. The relevant tax rate for this transaction is 30%. Be sure to specify the amounts (in thousands), titles and locations of all related impacts. Indicate in each case if impact is positive (+) or negative (-). Hint: Compare amount received with book value on date of sale.
Calculations | Inclusion On 2020 Income Statement
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| Operations Section:
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| Other Items Section:
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| Ordinary Inc. Before & Aft. Taxes:
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| Ordinary Inc Before Tax
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| Tax Expense _________
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| Ordinary Inc After Tax
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| Below-The-Line Section:
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| Net Income
Cost of the machine= $30,00,000
Estimated useful life- 8 year
The residual value of the machine= 120,000
Purchased on 28 February 2016
Sold on 30 November 2019
=
=360,000 pa.
Thus Depreciation for 3 years and 9 months would be, 3,60,000*3+3,60,000*9/12=10,80,000+270,000
=13,50,000
The mount should have capitalized by Smith on its purchase would be 30,00,000-13,50,000=$16,50,000
The amount should have capitalized by Smith on its purchase under the SLM method would be 30,00,000-13,50,000=$16,50,000
If Lewis uses the double-declining base method:
Formula= Straight-line depreciation rate*2
=1/8*2
=25%
Thus, Depreciation under Double declining method=30,00,000*25%
=7,50,000pa
Thus for 3 years and 9 months depreciation will be=22,50,000+562500=28,12,500
Thus we can say that using the Double declining method instead of the Straight line method, Lewis can take a benefit of $1462,500 due to increased depreciation ie. (2812500-13,50,000) provided the selling price of the equipment is the same under both the circumstances.
Thus, The reported gain under the DDB method will be higher as compared to the Straight-line method of depreciation.
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