ACCT410 Unit 3 IP - Acquisitions and Payments

# Acquisitions and payments philbrick sundem 2011 the

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ACQUISITIONS AND PAYMENTS Philbrick, & Sundem, 2011). The straight-line depreciation method is computed as follows (Elliott, et al 2011): Depreciation expense = (Acquisition cost - Estimated residual value) / Years of estimated useful life D = (C - R) / n D = (\$100,000 - \$10,000 / 4 D = \$90,000 / 4 D = \$22,500 This method over the four-year useful life of the equipment is shown as follows (Elliott, Horngren, Philbrick, & Sundem, 2011): Period Book Value Period Start Depreciation Expense Accumulated Depreciation Book Value Period End 1 \$ 100,000.00 \$ 22,500.00 \$ 22,500.00 \$ 77,500.00 2 \$ 77,500.00 \$ 22,500.00 \$ 45,000.00 \$ 55,000.00 3 \$ 55,000.00 \$ 22,500.00 \$ 67,500.00 \$ 32,500.00 4 \$ 32,500.00 \$ 22,500.00 \$ 90,000.00 \$ 10,000.00 Which Method Determination of which depreciation method that would result in a better yearend net income is now completed. The double-declining balance (DDB), being an accelerated method of depreciation is where an asset loses the book value at a quicker rate than in the straight-line method. The DBB allows for a lower value of the total assets on the balance sheet in the early years of the asset. This method is used by companies that expect the asset to be more useful in the beginning years. The straight-line method, since equaling out the depreciation value of the useful life period, would affect the net income by making it larger for the company. Therefore, the chosen depreciation method would be the straight-line method due to its ability to supply a higher yearend net income.

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ACQUISITIONS AND PAYMENTS Taxes Affected Taxes would be affected by the DDB (accelerated method) by lowering the total asset value on the balance sheet in the first year of useful life. Since the net income would be lower by the depreciation expense being higher, this would assist in shielding the company’s income from taxes. Commonly the DDB allows for more deductions during the first years of owning the asset and thus minimizes the taxable income. However, there is a higher depreciation expense that is recorded now when using the DDB method but as time goes on the depreciation would be less; higher taxes towards the useful life end date of the asset net income. In effect, this would defer taxes for the company but would not help to avoid these taxes.
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