Question

Cycle Inc. purchased equipment that will help diagnose problems with engines. The equipment cost $200,000 on January 1, 2019 and a residual value of $10,000 was anticipated, with a useful life of 5 years. In 2019, Cycle Inc. has a gross profit of $400,000 and operating expenses of $180,000. Cycle Inc. has a tax rate of 30%.
Required:

1. Compute the Depreciation Expense for 2019 under both the straight-line and double-declining balance depreciation methods.
2. What is the net cash saved if the accelerated depreciation method is used in 2019?

Answer 1

Answer:

Explanation:

Cost of equipment - $200,000

Residual value  $ $10,000

Depreciable amount - ($200000-$10000) =190000

Straight line depreciation rate = 1/5*100 = 20%

Depreciation = 190000*20%=38,000

Double declining balance = 2*20%*200000 =80000

Income statement (straight Line )                 Double declining

Gross profit                    $400,000                  $400,000

Operating expense       $180,000                    $180,000

Depreciation                   $38,000                      $80000

PBIT                                  $182,000                    $140,000

Tax (30%)                          $54600                      $ 42000

Net profit                          $127400                      $98,000

2)As depreciation is a non cash expenses , using different types of depreciation does not yield any cash savings.

It can only yield differences on the profit as seen in the income statement