Question

On January 1, 2015, Swift Corporation, a small manufacturer of machine tools, acquired new industrial equipment for $1,320,000. The new equipment had a useful life of five years and the residual value was estimated to be $60,000. Swift estimates that the new equipment can produce 14,500 machine tools in its first year. It estimates that production will decline by 1,000 units per year over the equipment’s remaining useful life.

The following depreciation methods may be used: (1) straight-line, (2) double-declining-balance, and (3) unit of production. For tax purposes, the CCA class is Class 10—30%.

Prepare a schedule showing the amount of accumulated depreciation at December 31, 2017, under straight-line method, double-declining balance method and units-of-output method.

		Straight-line		Double-declining balance		Units-of-output
2015		$		$		$
2016		$		$		$
2017		$		$		$

Which of the three depreciation methods would maximize net income for financial statement reporting purposes for the three-year period ending December 31, 2017?

_________________________

would maximize net income for financial statement reporting purposes for the three year period ending December 31, 2017.

Answer 1

Solution:

Straight line method
Cost	1320000
Salvage value	60000
Depreciable value	1260000
Life	5
Annual depreciation	252000
Double -declining method
Year	Depreciation expense
2015	(1320000/5)*2 = 528000
2016	(1320000-528000)*40% = 316800
2017	(1320000-844800)*40% = 190080
units of output		Year	Expected output	Depreciation expense
Cost	1320000	2015	14500	292320
Salvage value	60000	2016	13500	272160
Depreciable value	1260000	2017	12500	252000
Expected Life output	62500	2018	11500
Unit depreciation expense	20.16	2019	10500
	SLM	Double declining balance	Units-of-output
2015	$252000	$528000	$292320
2016	$252000	$316800	$272160
2017	$252000	$190080	$252000
Total	$756000	$1034880	$816480

Answer : Straight line method would maximize net income for three year period ending December 2017.