On January 1, MusicPro paid $92,000 for production equipment which was expected
ID: 2476398 • Letter: O
Question
On January 1, MusicPro paid $92,000 for production equipment which was expected to provide 16,000 hours of recording time. The company estimated that the equipment would be used for the next 10 years, at the end of which time it could be sold for $12,000. During the first three years of life, 1,800, 1,600, and 2,100 hours, respectively, of recording time was used.
A. Calculate depreciation expense for Year 1 for MusicPro using:
Straight-line depreciation
Double-declining depreciation
Units-of-production
B. Which method is preferable for tax purposes? Explain
Explanation / Answer
A./
STRAIGHT LINE DEPRICIATION
= ($92000 - $12000) / 10 YEARS
= $8000 PER YEAR
DEPRICIATION %
= $8000 / $80000
= 10%
--------------------------------------------------------------------------------------------------------------------------------
DOUBLE DECLINNING DEPRICIATION
= $92000 * 20%
= $18400
-----------------------------------------------------------------------------------------------------------------------------------
UNITS OF PRODUCTION
= [($92000 - $12000) / 16000] * 1800
= $9000
B./
DOUBLE DECLINNING METHOD IS PREFERRABLE FOR TAX PURPOSES, BECAUSE IT GIVES HIGHER DEPERICATION IN INITIAL YEARS.