Cycle Inc. purchased equipment that will help diagnose problems with engines. The equipment cost $200,000 on January 1, 2019 and a residual value of $10,000 was anticipated, with a useful life of 5 years. In 2019, Cycle Inc. has a gross profit of $400,000 and operating expenses of $180,000. Cycle Inc. has a tax rate of 30%.

Required:

1. Compute the Depreciation Expense for 2019 under both the straight-line and double-declining balance depreciation methods.
2. What is the net cash saved if the accelerated depreciation method is used in 2019?

Explanation:

Cost of equipment - $200,000

Residual value  $ $10,000

Depreciable amount - ($200000-$10000) =190000

Straight line depreciation rate = 1/5*100 = 20%

Depreciation = 190000*20%=38,000

Double declining balance = 2*20%*200000 =80000

Income statement (straight Line )                 Double declining

Gross profit                    $400,000                  $400,000

Operating expense       $180,000                    $180,000

Depreciation                   $38,000                      $80000

PBIT                                  $182,000                    $140,000

Tax (30%)                          $54600                      $ 42000

Net profit                          $127400                      $98,000

2)As depreciation is a non cash expenses , using different types of depreciation does not yield any cash savings.

It can only yield differences on the profit as seen in the income statement

they work in some type of way