Question

Solar Innovations Corporation bought a machine at the beginning of the year at a cost of $38,000. The estimated useful life was five years and the residual value was $4,000. Assume that the estimated productive life of the machine is 10,000 units. Expected annual production was year 1, 2,000 units; year 2, 3,000 units; year 3, 2,000 units; year 4, 2,000 units; and year 5, 1,000 units.

Required:

1. Complete a depreciation schedule for each of the alternative methods.
   a. Straight-line.
   b. Units-of-production.
   c. Double-declining-balance.

2. Which method will result in the highest net income in year 2? Does this higher net income mean the machine was used more efficiently under this depreciation method?

Answer 1

.straight line method explanation asset cost 38,000 residual value 4,000 life in years straight line depreciation = asset cost - residual value) /life a). ANSWER 6800 year Depreciation schedule - straight line End of the year amounts accumulated depreciation depreciation Book value acqisition 38,000 year 1 6800 6800 31,200 6800 13600 24,400 6800 20400 17,600 6800 27200 10,800 6800 34000 4,000

-units of activity method asst value initial cost) scrap value projected production units depreciationcost per hour =(asset cost-scrap)/total production units 38,000 4,000 10000 3.40 rate 3.40 year year 1 2 3 units 2000 3000 2,000 2000 1000 3.40 3.40 3.40 3.40 depreciation 6800 10200 6800 6800 3400 11 b). ANSWER SOLAR INNOVATIONS Depreciation schedule - units of production End of the year amounts accumulated year depreciation depreciation acqisition year 1 6800 6800 2 10200 17000 6800 23800 6800 30600 3400 34000 Book value 38,000 31,200 21,000 14,200 7,400 4,000

double declining method depreciation 40% asset book value at depreciation accumulated boobk value at year beginning expense dep end of year year 1 38,000 15200 15200 22,800 22,800 9120 24320 13,680 3 13,680 5472 29792 8,208 8 ,208 3,283 33,075 4,925 5 4,925 925 34,000 4,000 answer c) SOLAR INNOVATIONS Depreciation schedule - double declining method End of the year amounts accumulated depreciation depreciation Book value 4 year acqisition year 1 2 15200 9120 5472 3283 15200 24320 29792 33,075 34,000 38,000 22,800 13,680 8,208 4,925 4,000 925

2) answers

straight line method results in highest net income in the year 2 , because it has lower depreciation than other methods

machine is not used efficiently under this method