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Tax and Book Depreciation Methods

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1. Why would a company use straight-line depreciation to prepare its financial statements and the declining balance method using twice the straight-line rate to prepare it tax return?

2. A company purchased a machine on January 1, 2011 for $400,000. The machine had an expected useful life of 10 years and it was expected to be able to produce 1 million units during the 10 years. The expected salvage value of the machine was $20,000. During 2011, 90,000 units were produced.

Required:
1. Determine depreciation expense for 2011 using:
a. Straight-line
b. Declining balance using twice the straight line rate.
c. Units of activity.

2. The machine was sold on January 1, 2013 for $300,000. The company used straight-line depreciation. Prepare the journal entry that records the sale.

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Solution Summary

The solution uses tax and book depreciation methods, and provides entries for machine depreciation and sale.

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