Question

QUESTION 2

1. 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:

2. year budget cumulative

   2019 65000 740000

   total 740000 743000

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

Answer 1

Answer is B 1 Explanation: i) Statement is false. The book value will be higher in 2018 and hence there will be loss on disposal there is gain on sale of assets ii) Statement is true. Depreciation as per straight line method and units of production will same over the life of asset Straight line charges depreciation based on life of asset and units of production based on units produced iii) Statement is false. If depreciation calculated based on activity level is higher than SLM method net income will lower as per units-of-production method iv) Statement is false. Depreciation rate is calculated based on budgeted units but charged based on actual production