Sullivans Office Service purchased a new computer system in 2013 for $50,000. It is expected to have a five year useful life and a $5,000 salvage value. The company expects to use the system more extensively in the early years of its life.
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 cash flow for any year? Why or why not?
d. Assume that Sullivans Office Service sold the computer system at the end of the fourth year for $16,000. Compute the amount of gain or loss using each depreciation method.
e. Explain any differences in gain or loss due to using the different methods.