Effect of straight line versus double declining balance depreciation on the recognition of expense and gains or losses
One Hour Laundry Services purchased a new steam press machine on January 1, for $45,000. It is expected to have a five year useful life and a $5,000 salvage value. One Hour expects to use the equipment more extensively in the early years.
Required
a. Calculate the depreciation expense for each of the five years, assuming the use of straight line depreciation.
b. Calculate the depreciation expense for each of the five years, assuming the use of double declining balance depreciation.
c. Would the choice of one depreciation method over another produce a different amount of annual cash flow for any year? Why or why not?
d. Assume that One Hour Laundry Services sold the steam press machine at the end of the third year for $26,000. Compute the amount of gain or loss using each depreciation method.