5. On January 2, 20X1, St. Paul Vision Center purchased equipment at a cost of $63,000. Before placing the equipment in service, St. Paul spent $2,200 for special chips, $800 for a platform, and $4,000 to customize the equipment. St. Paul management estimates that the equipment will remain in service for 6 years and have a residual value of $16,000. The equipment can be expected to process 18,000 examinations in each of the first 4 years and 14,000 tests in each of the next 2 years. In trying to decide which depreciation method to use, Lana Rich, the general manager, requests a depreciation schedule for each method (straight-line, units-of- production, and double declining balance). _ Required A. Prepare a depreciation schedule for each of the depreciation methods, showing asset cost, depreciation expense, accumulated depreciation, and asset book value. B. St.Paulreportstocreditorsinthefinancialstatementsusingthedepreciationmethodthat maximizes reported income in the early years of asset use. For income tax purposes, however, the company uses the depreciation method that minimizes income-tax payments in those early years. Consider the first year that St. Paul uses the equipment. Identify the depreciation methods that meet the general manager’s objectives, assuming the income tax authorities would permit the use of any of the methods.

Here is the depreciation schedule for each of the depreciation methods:

Depreciation Method Asset Cost Depreciation Expense Accumulated Depreciation Asset Book Value

Straight-line $63,000 $10,500 $10,500 $52,500

Units-of-production $63,000 $14,400 $14,400 $48,600

Double-declining balance $63,000 $18,900 $18,900 $44,100

As you can see, the straight-line method results in the lowest depreciation expense over the life of the asset, while the double-declining balance method results in the highest depreciation expense. The units-of-production method falls somewhere in between.

In the first year, St. Paul will report the highest depreciation expense using the double-declining balance method. This is because the double-declining balance method depreciates the asset more rapidly in the early years of its life. The straight-line method will result in the lowest depreciation expense in the first year.

Assuming the income tax authorities would permit the use of any of the methods, St. Paul would want to use the double-declining balance method for income tax purposes in the first year.

This is because the double-declining balance method will result in the highest depreciation expense, which will lower St. Paul's taxable income in the first year. For financial reporting purposes, St. Paul would want to use the straight-line method in the first year. This is because the straight-line method will result in the lowest depreciation expense, which will maximize St. Paul's reported income in the first year.

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4. Vacation Properties began January with concession inventory of $48,000. The business made net purchases of concessions for $106,000 and had net sales of $200,000 before a fire destroyed its concession inventory. For the past several years, Vacation Properties’ gross profit percentage has been 40%. Estimate the cost of the concession inventory destroyed by the fire.