LO9-3

EXERCISE 9.3

Depreciation for Partial Years On August 3, Cinco Construction purchased special-purpose equipment at a cost of $1,000,000. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $50,000.

a. Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the straight-line depreciation method (half-year convention).

b. Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the 200 percent declining-balance method (half-year convention) with a switch to straight-line when it will maximize depreciation expense.

c. Which of these two depreciation methods (straight-line or double-declining-balance) results in the highest net income for financial reporting purposes during the first two years of the equipments use? Explain.