Answer:
purchase price $60,000
estimated useful life 14 years
residual value $12,000
depreciation expense using straight line method:
using straight line = ($60,000 - $12,000) / 14 = $3,428.57
depreciation during year 3 = $3,428.57
book value at end of year 5 = $60,000 - ($3,428.57 x 5) = $42,857.15
depreciation expense using SL method and 200% DB method with switchover to SL:
year 1 = $60,000 x 2 x 1/14 = $8,571.43
year 2 = $51,428.57 x 2 x 1/14 = $7,346.94
year 3 = $44,081.63 x 2 x 1/14 = $6,297.38
year 4 = $37,784.25 x 2 x 1/14 = $5,397.75
year 5 = $32,386.50 x 2 x 1/14 = $4,626.64
book value at end of year 5 = $27,759.86
Since the depreciation expense using double balance with switchover to straight line is higher during the first years, then the company should use that method. One extra dollar in depreciation expense = one less dollar in taxable income. It is usually better pay less taxes today than tomorrow.
