Writing Assignment: Read The Scenario Below And Answer Quest

Writing Assignmentread The Scenario Below And Answer Questions 13

Read the scenario below and answer questions 1–3 in a Microsoft Word document. For question 1, give your answer and show your work. For Questions 2 and 3 answer each question in a paragraph of at least 100 words. Use APA format and cite any sources.

Sanders Construction Co. specializes in building replicas of historic houses. Brett Sanders, president of Sanders Construction, is considering the purchase of various items of equipment on July 1, 2014, for $300,000. The equipment would have a useful life of 5 years and no residual value. Brett is considering depreciating the equipment by the straight-line method or the double declining balance method. Answer the following questions:

1. Calculate the depreciation for the first year using the straight-line method and the Double declining balance method, show your work.
2. In a short paragraph, explain the straight-line depreciation method and the Double declining balance method.
3. In your opinion, which method would be better for the company to use, why? Explain your answer.

In this Assignment on calculating depreciation using different methods, you will engage in developing the following professional competency: Make sure your document includes: · Your Name · Date · Course Name and Section Number · Unit Number · Assignment Name · Page Numbers

Directions for Submitting your Assignment

Compose your Assignment in a Microsoft Word document and save it as Username AC113 Writing Assignment (Example: Jsmith AC113 Unit 8 Writing Assignment.doc). Submit your file by selecting the appropriate Unit 8: Writing Assignment Dropbox by the end of Unit 8.

Paper For Above instruction

The consideration of depreciation methods is critical for organizations like Sanders Construction Co., which invests in significant assets with long-term utility. The selection of the appropriate depreciation method influences financial statements, tax obligations, and managerial decision-making. This paper calculates the depreciation for the first year using both the straight-line and double declining balance methods, explains these depreciation techniques, and offers an informed opinion on which method might be more advantageous for the company.

Depreciation Calculation

The initial step involves calculating depreciation for the first year using both methods based on the equipment's cost of $300,000, a useful life of five years, and no residual value. Under the straight-line method, depreciation expense is evenly spread over the asset's useful life. The formula is:

Depreciation Expense = (Cost of Asset – Residual Value) / Useful Life

Applying the numbers: (300,000 – 0) / 5 = $60,000 per year.

Thus, the depreciation expense for the first year using the straight-line method is $60,000.

In contrast, the double declining balance (DDB) method accelerates depreciation, allocating more expense earlier in the asset's life. The DDB rate is twice the straight-line rate:

Straight-line rate: 1 / 5 years = 20%.

Double declining rate: 2 × 20% = 40%.

The first year depreciation using DDB is calculated on the initial cost:

Depreciation = Carrying amount at beginning of year × DDB rate = $300,000 × 40% = $120,000.

Therefore, the depreciation expense for the first year under DDB is $120,000.

Explanation of Depreciation Methods

The straight-line depreciation method allocates an equal amount of depreciation expense annually over the asset's useful life. This approach offers simplicity and consistency, making it easy for companies to predict expenses and prepare financial statements. It assumes the asset's economic benefits are consumed uniformly over its useful life, which is appropriate for assets with consistent usage or wear. Conversely, the double declining balance (DDB) method is an accelerated depreciation technique that applies a higher expense in the earlier years and decreasing amounts in later years. This method reflects the reality that most assets tend to lose value faster initially due to higher usage or obsolescence, aligning depreciation expense more closely with asset utility and tax benefits during the earlier periods.

Recommendation and Rationale

In choosing the most appropriate depreciation method for Sanders Construction Co., consideration of financial and tax implications is essential. The double declining balance method offers significant advantages in the early years of asset use by providing higher depreciation expenses. This results in reduced taxable income during initial periods, which can be advantageous for cash flow management, especially for a construction company that may benefit from accelerated expense recognition. Moreover, accelerated depreciation better matches the actual economic decline of the equipment, especially if the asset is subject to rapid obsolescence or heavy usage early on. However, the straight-line method's simplicity and stability are desirable for consistent financial reporting and can be beneficial for long-term planning and investor transparency. Ultimately, if Sanders Construction prioritizes tax savings and cash flow optimization in the initial years, the double declining balance method would be more beneficial. Conversely, if the company seeks simplicity and consistent expense recognition, straight-line depreciation may be preferable.

References

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