On August 5, Quattro Building Co. purchases equipment costing $1,000,000. The useful life of the equipment was estimated to be eight years, with an estimated residual value of $50,000.

a) Compute the depreciation expense to be recognized each calendar year for financial reporting purposes (for every year that the asset will be depreciated) under the straight-line depreciation method (half-year convention).

b) Compute the depreciation expense to be recognized each calendar year for financial reporting purposes under the 200 percent declining-balance method (half-year convention) with a switch to straight-line when it will maximize depreciation expense.

c) Which of these two depreciation methods (straight-line or double-declining balance) results in the highest net income for financial reporting purposes during the first two years of the equipment’s use? Explain.