Question

2. Small Valley Ltd. purchased machinery on January 2, 2015, at a total cost of $85,000. The machinery's estimated useful life is 8 years or 60,000 hours, and its residual value is $5,000. The tax rate for CCA is 30%. During 2015 and 2016, the machinery was used 7,000 and 7,500 hours, respectively. Required: a) Compute depreciation under straight-line, units-of-production, and declining-balance methods for 2015 and 2016. b) If management's objective in 2015 is to maximize income which method would you prefer? If it was income smoothing which method would you prefer? c) It was decided in 2015 that Small Valley would use the straight-line method of depreciation. In December 30, 2016 Small Valley sold the equipment for $55,000 cash. Prepare ALL journal entries relating to the equipment and disposal in 2016. d) It was decided in 2015 that Small Valley would use the deminishing balance method of depreciation. In December 30, 2016 Small Valley sold the equipment for $55,000 cash. Prepare ALL journal entries relating to the equipment and disposal in 2016. e) Looking at your answers in part c) and d) explain why there was a difference in the gain or loss recorded from the sale of the equipment.

Answer 1

2. January 2, 2015 Cost of Machinery = $85,000 щ - 3 yu / 60,000 Восы Residual value = $ $ooo I a Straight line method : 2016 Depreciation = 85000-5000 2015 10,000 $ 10,000 units of Production method 2016 2015 Depreciation ( 85000-5000 x 7000 60.000 = $ 9,333 (05000-5000)x7500 60000 = $ 10,000 Declining Assuming Balance method depreciation rate = 30% 2015 2014 (85000-5000) x30% (80000-24008) 730% - $24,000 = $ 16,800 Depreciation


b) If management's objectives in 2015 is to manimise profit, then, units of production method should be used. And, if incoms smoothing is the objection, then straight line depeciation should le used c) Jan 2, 2015 machinery To Bank Dr. 85,0085,000 Dec 31,2015 10,000 To Ace. Depreciation 10,000 Dec 30,2016 PEL 10000 Deprecealia To Ace 10,000 Bank Acc. Dep. Los on disposal 55,000 Ds. J0,000 D. 10,000 To machemy 85,000