Two Methods of Calculating Depreciation Expense
A firm purchased a computer controlled drill press for $480,000 at the beginning of 2000. The drill press has an expected useful life of 10 years and zero residual value. Assume that the firm begins the year with the following balance sheet accounts, ignoring depreciation on the existing plant and equipment:
|
Cash and other assets |
$8,115,000 |
|
Plant and equipment |
$3,500,000 |
|
Less: Accumulated depreciation |
(1,040,000) |
|
Plant and equipment, net |
$2,460,000 |
|
Liabilities |
$1,000,000 |
|
Shareholders’ equity |
$9,575,000 |
Required
a. Show the effects of the drill press purchase on the firm’s balance sheet equation. Assume that the firm borrowed money to purchase the drill press.
b. Show the effects of straight line depreciation on the balance sheet equation for the first two years of the drill press’s life.
c. Show the effects of double declining balance depreciation on the balance sheet equation for the first two years of the drill press’s life.
d. Comment on these differences. Is the firm’s balance sheet stronger under either method? Why?