Zoe Corporation bought a large piece of equipment for $9,000,000 during 2013. When the company purchased the equipment, it estimated a useful life of five years ignoring the year of acquisition, and a residual value of $800,000. During 2016 the equipment was sold for $5,000,000. The company does not record depreciation expense in the year of acquisition or disposal.
Required:
a. Calculate the depreciation expense for 2013, 2014, and 2015, and compute any gain or loss on disposal for 2016 assuming the company used the straight-line method to determine depreciation expense.
b. Calculate the depreciation expense for 2013, 2014, and 2015 and any gain or loss on disposal for 2016 assuming the company used the declining balance method to determine depreciation expense. The depreciation rate will be 2/5 or 40%. What is the cumulative effect of the depreciation expense and any gain or loss for the four years under review?
c. What caused the gain on disposal for the declining method in 2016 or the loss on disposal for the straight-line method in 2016? Does a gain on disposal suggest good or excellent management and a loss on disposal indicate poor management? Explain your conclusion.
d. What can gains or losses on disposal tell us about prior years’ reported net incomes?