Question

On January 1 of Year 1, Mary Company purchased a piece of equipment for $200,000. The estimated life of the equipment is 5 years. Mary estimates that the equipment can be sold for $60,000 at the end of its life.Harry Company uses double-declining balance depreciation. For Year 2 (the SECOND year), Mary Company’s net income was $100,000. What would Mary Company’s net income have been in Year 2 (the SECOND year) assuming that Mary Company had initially (on January 1, Year 1) decided NOT to use double-declining balance depreciation but had instead used straight-line depreciation? Note: Ignore income taxes. Write the dollar amount of your answer (do not write the dollar sign).

Answer 1

Calculation of depreciation using double declining balance method :-

Depreciation rate = (1/5) x 2 = 40%

Year 1 = 200,000 x 40% = 80,000

Year 2 = (200,000 - 80,000) x 40% = 48,000

Income becore depreciation in year 2 =

Net income + depreciated = 100,000 + 48,000

= $148,000

Calculation of depreciation using straight line method :-

Yearly depreciation = (200,000 - 60,000)/5

= $28,000

Year 2 depreciation = $28,000

Net income if straight line method is used :-

Income becore depreciation - depreciation

= 148,000 - 28,000 = $120,000