Chapter 8, Problem 22AE

Depreciation methods (Learning Objective 3) 15-20 min.

Mercy Medical Center bought equipment on January 2 for $42,000. The equipment was expected to remain in service for four years and to perform 1,200 operations. At the end of the equipment’s useful life, Mercy estimates that its residual value will be $6,000. The equipment performed 120 operations the first year, 360 the second year, 480 the third year, and 240 the fourth year.

Requirements

1. 1. Prepare a schedule of depreciation expense per year for the equipment under the three depreciation methods. After two years under double-declining balance depreciation, the company switched to the straight-line method. Show your computations.
2. 2. Which method most closely tracks the wear and tear on the equipment?
3. 3. Which method would Mercy prefer to use for income tax purposes in the first years of the equipment’s life? Explain in detail why a taxpayer would prefer this method.