Rodriguez Company acquired sophisticated production equipment at a cost of $450,000. In addition, the firm paid $7,540 to have the equipment delivered and another $11,435 was spent on installation and testing. The annual cost paid to insure the equipment while used in production is $3,000. The expected life of the new equipment is six years, and the estimated salvage value is $40,000. Management, however, is concerned about changing technology in the industry. With each year that passes, it will become more and more likely that new production technology will render this equipment obsolete. Management needs to choose between use of straight-line depreciation and double-declining-balance. The company expects that income before depreciation expense and income taxes will be approximately $160,000 per year. The firm’s corporate tax rate is 35%.

Required

A. Determine the cost of the equipment that should be recorded in the accounting system.

B. Use the straight-line (SLN) and double-declining-balance (DDB) functions from Excel or another spreadsheet program as an aid to constructing a schedule that shows (1) depreciation expense each year under each alternative, and (2) ending book value each year under each alternative.

C. Prepare a projected income statement for the six years assuming straight-line depreciation is used. (You need to prepare only one projected income statement because all years yield exactly the same result.) Start with Income Before Depreciation and Taxes and conclude with Net Income.

D. Prepare projected income statements for all six years assuming double-declining-balance depreciation is used. Start with Income Before Depreciation and Taxes and conclude with Net Income.

E. Compare your results from parts C and D. Why is it important that a reader of financial statements consult the notes to the financial statements to determine the depreciation method in use?