Question

Simple Solutions purchased a new machine on January 1, 2016 for $62,000. It is expected to have a useful life of 5-years or 24,000 machine hours and a $2,000 salvage value. The company feels the equipment will be used extensively in the early years. a. Calculate the depreciation expense for each of the 5 years, assuming the use of the straight-line method. b. Calculate the depreciation expense for each of the 5 years, assuming the use of an accelerated method using double the straight-line rate (.e. double declining balance). (Hint: In the last year of the equipment's life....your depreciation expense should be whatever amount is needed to cause Book Value to equal Salvage Value. You will have to "plug" this number, because the regular calculation for double-declining balance will not provide enough depreciation expense to fully depreciate the asset in the last year of its estimated life. GAAP states that you should only depreciate your equipment down to the point where book value equals salvage value.) c. Calculate the depreciation expense for each of the 5 years, assuming the use of units-of-activity. The machine was used for 6200 hrs in 2016, 6500 hrs in 2017, 5100 hrs in 2018, 3800 hrs in 2019 and 2400 in 2020 d. Would the choice of one depreciation method over another produce a different amount of income each year? Would the choice of one depreciation method over another produce a different amount of annual cash flow for any year (ignore the income tax implications because the method chosen for tax reporting would be different than any of these methods). Why or why not? e. Assume Simple Solutions uses the Straight-line method of depreciation and that it sold the machine on March 31 of the fourth year for $15,000. Compute the amount of gain or loss. Answers: Straight-line Double-declining balance Units of Activity a. 2016 b. 2016 C. 2016 2017 2017 2017 2018 2018 2018 2019 2019 2019 2020 2020 2020

Answer 1

Year	SLM	Double declining method	units of activity
1	12,000.00	24,000.00	19,578.95
2	12,000.00	14,400.00	20,526.32
3	12,000.00	8,640.00	315.79
4	12,000.00	5,184.00	12,000.00
5	12,000.00	3,110.40	7,578.95
	60,000.00	55,334.40	60,000.00

Units of activity (total years =19000), for the respective year( for eg) it shall be computed as : (Asset-carrying value)*units of activity of that year(6200)/ total units of activity (19000).

d) yes, depreciation expense reduces net income when the asset's cost is allocated or expensed on the income statement.

No, the choice of depreciation does not affect the cash flows as depreciation is not an expense incurred in cash. as there is no outflow due to this particular cash flows remain unaffected.

e)If simple solutions sold the asset at march 31, fourth year for an amount of $15000, gain or loss shall be.

Carrying value of the asset=60000-(12000)*3=$24,000

depreciation for the period (jan,1 to march31)=12000*3months/12months=$3000

Carrying vale on march 31= $24000-3000 =$21000

THe asset was sold for $15000, hence loss on sale = $21000-$15000= $6000.

please provide feedback