Question

On September 1, 2011, a company purchased a weaving machine for $239,800. The machine has an estimated useful life of 8 years and an estimated residual value of $17,800. Additionally, it is estimated that the machine would produce 740,000 bolts of woven fabric over its useful life. The company ended up selling the machine in 2018 after 1 month of use.

The following budgeted and actual activity levels were provided to support your work:

Consider the above information and the below statements and select the answer choice below that shows the number of true statements. If applicable, round your intermediate calculations to 3 decimals and your final answer to the nearest $1.

(i) in the year of disposal, the company will record a gain if they sell the asset for more than $17,800.

(ii) over the life of the asset, the company will record the same total amount of depreciation no matter if they use straight line or units-of-production.

(iii) the company will report more net income in 2011 under the units of production method than under straight line.

(iv) under US GAAP, when recording depreciation using the units-of-production method, the company should use the budgeted activity level as it will smooth the expense and avoid fluctuations in net income.

	A.	0
	B.	2
	C.	1
	D.	3
	E.	4

Answer 1

Sno.	Statement	True/False	Reason
i	in the year of disposal, the company will record a gain if they sell the asset for more than $17,800	TRUE	Residual value of the asset is 17800 so if the machinery is sold after using complete life of the asset and sold for more than $17800 then the company will be in profit.
ii.	over the life of the asset, the company will record the same total amount of depreciation no matter if they use straight line or units-of-production.	TRUE	Depriciation as per SLM is
			($239800-$17800)/8=$27750
			Depriciation as per Unit prodution method
			[Estimated Production Capability(Original Value − Salvage Value)​]×Unit produce in a year
			Unit production In a year is missing, So if we assume the unit production in each year is 740000/8=92500 then depriciation would be same
			DE= ($239800-$17800)*92500Units/740000Units
			DE= $27750
iii	the company will report more net income in 2011 under the units of production method than under straight line.	FALSE	As per the assumption considered above, if the unit production in each year is 92500 then net income would be same as in the SLM of depriciation
iv.	under US GAAP, when recording depreciation using the units-of-production method, the company should use the budgeted activity level as it will smooth the expense and avoid fluctuations in net income.	TRUE	Statement is true, Calculation of depriciation by dividind budgted unit production give us the rate per unit we depriciete the aseet which will help in true and fair presentation of the financial statement
D is the Correct answer 3 statement is true