An item of equipment acquired on January 1 at a cost of $50,000 has an estimated life of five years and an estimated salvage of $10,000.
a. From a management perspective, from among the straight-line method, declining-balance method, and sum-of-the-years’-digits method of depreciation, which method should be chosen for the financial statements if income is to be at a maximum the first year? Which method should be chosen for the income tax returns, assuming that the tax rate stays the same each year? Explain and show computations.
b. Is it permissible to use different depreciation methods in financial statements than those used in tax returns?