Question

Solar Innovations Corporation bought a machine at the beginning of the vear at a cost of $22,000. The estimated useful life was five years and the residual value was $2,000. 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? Complete this question by entering your answers in the tabs below. Reg 1A Reg 1B Req 1C Reg 2A Reg 28 Complete a depreciation schedule for Units-of-production method. (Do not round intermediate calculations.) Balance Sheet Income Statement Depreciation Expense Year Cost Accumulated Book Value Depreciation At acquisition

Answer 1

• Calculation Depreciation under straight-line method.
• Formula for calculating depreciation under straight line method is, (cost of asset - Salvage value)/useful life of the asset. Here in this case it will be (22000-2000)/5 = 4000 every year
• Depreciation schedule under Straight line method

• 	Income Statement	Balance Sheet
  Year	Depreciation Expense	Cost	Accumulated Depreciation	Book Value
  At Acquisition	-	22,000.00	-	22,000.00
  1	4,000.00	22,000.00	4,000.00	18,000.00
  2	4,000.00	22,000.00	8,000.00	14,000.00
  3	4,000.00	22,000.00	12,000.00	10,000.00
  4	4,000.00	22,000.00	16,000.00	6,000.00
  5	4,000.00	22,000.00	20,000.00	2,000.00

• Calculation of Depreciation under Units of production
• The formula will be (cost of purchase - salvage value)/Total units of capacity*Units produced in the current year.

• Year	Units Produced	Depreciation (above formula)
  1	2000	4000
  2	3000	6000
  3	2000	4000
  4	2000	4000
  5	1000	2000

  Total units = 10000 units.

• Depreciation Schedule,

• 	Income Statement	Balance Sheet
  Year	Depreciation Expense	Cost	Accumulated Depreciation	Book Value
  At Acquisition	-	22,000.00	-	22,000.00
  1	4,000.00	22,000.00	4,000.00	18,000.00
  2	6,000.00	22,000.00	10,000.00	12,000.00
  3	4,000.00	22,000.00	14,000.00	8,000.00
  4	4,000.00	22,000.00	18,000.00	4,000.00
  5	2,000.00	22,000.00	20,000.00	2,000.00

• Calculation of depreciation under the double-declining method,
• Formula is Straight-line depreciation rate (100%/5 years)*2*Book value at the beginning of the period
• Depreciation Schedule,

• 	Income Statement	Balance Sheet
  Year	Depreciation Expense	Cost	Accumulated Depreciation	Book Value
  At Acquisition	-	22,000.00	-	22,000.00
  1	8,800.00	22,000.00	8,800.00	13,200.00
  2	5,280.00	22,000.00	14,080.00	7,920.00
  3	3,168.00	22,000.00	17,248.00	4,752.00
  4	1,900.80	22,000.00	19,148.80	2,851.20
  5	1,140.48	22,000.00	20,289.28	1,710.72

• Highest Net Income in Year 2,  the net income will be higher if the expenses are less that is when the depreciation expense is less.
• Here in this case depreciation under straight line method is the lowest (4000), and therefore it will result in the highest net income.

• The Higher Net income doesn't mean about the efficiency of the machine, it is something related to the method used under depreciation which has nothing to do with the efficiency of the machine, Therefore the answer is NO.