Question

Tory Enterprises pays \(238,400 for equipment that will last five years and have a \)43,600 salvage value. By using the equipment in its operations for five years, the company expects to earn $88,500 annually, after deducting all expenses except depreciation. Prepare a table showing income before depreciation, depreciation expense, and net (pretax) income for each year and for the total five-year period, assuming double-declining-balance depreciation is used.

Short answer

The net income at the end of 5 years is $88,500.

Step-by-step solution

Formula used in double-declining-method

$\mathbf{Straight}\mathbf{}\mathbf{line}\mathbf{}\mathbf{rate}\mathbf{=}\mathbf{100}\mathbf{\%}\mathbf{÷}\mathbf{Useful}\mathbf{}\mathbf{life}$

$\mathbf{Double}\mathbf{}\mathbf{declining}\mathbf{}\mathbf{balance}\mathbf{}\mathbf{rate}\mathbf{=}\mathbf{2}\mathbf{\times }\mathbf{Straight}\mathbf{}\mathbf{line}\mathbf{}\mathbf{rate}$

$\mathbf{Depreciation}\mathbf{}\mathbf{expense}\mathbf{=}\mathbf{Double}\mathbf{}\mathbf{declining}\mathbf{}\mathbf{balance}\mathbf{}\mathbf{rate}\mathbf{\times }\mathbf{Beginning}\mathbf{}\mathbf{period}\mathbf{}\mathbf{book}\mathbf{}\mathbf{value}$

Computation of depreciation

$\begin{array}{rcl}\mathrm{Straight} \mathrm{line} \mathrm{rate}& =& 100\%÷5\mathrm{years}\\ & =& 20\%\end{array}$

$\begin{array}{rcl}\mathrm{Double} \mathrm{declining} \mathrm{balance} \mathrm{rate}& =& 2\times 20\%\\ & =& 40\%\end{array}$

Depreciation expenses

Year	Book in thebeginning	Depreciation rate	Depreciation expense	Book value
1	$238,400	40%	$95,360	$143,040
2	$143,040	40%	$57,216	$85,824
3	$85,824	40%	$34,330	$51,494
4	$51,494	40%	$7,894	$43,600 (Salvage value)
5	$43,600	40%	-	$43,600 (Salvage value)

Income before and after depreciation

Year	Income before depreciation	Depreciation expense	Net income
1	$88,500	$95,360	$6,860 (loss)
2	$88,500	$57,216	$31,284
3	$88,500	$34,330	$54,170
4	$88,500	$7,894	$80,606
5	$88,500	-	$88,500