Response to the following problem:
Murphy Limited purchased a $30,000 asset with a five-year life expectancy and no residual value. Two alternative methods of calculating depreciation expense are presented below.
| Year |
Method A |
Method B |
|
1
|
$3,000
|
$6,000
|
|
2
|
6,000
|
9,600
|
|
3
|
?
|
?
|
Required:
1. Identify the method of depreciation and compute the depreciation expense for the third year under each method.
2. The chief financial officer of Murphy considers depreciation to be nothing more than an arbitrary calculation, based on unreliable estimates. She proposes to use method B for years 1 and 2 and method A for years 3, 4, and 5. In this way, she can deduct the maximum depreciation each year over the life of the asset. Is her proposal acceptable? Why or why not?
3. What factors should be considered in choosing a method of depreciation?