Question

Solar Innovations Corporation bought a machine at the beginning of the year at a cost of $41,000. 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

41000 4000 37000 Cost of the Machine Less : Salvage Value Depreciable Value of the Machine Life of the Machine Life of the Equipement (Units) Straight Line Method Annual Depreciation : Depreciable Value / Life annual Depreciation :37000/5 10000 7400 Income Statement Depreciation Expenses Year At Acquisition 7400 7400 7400 7400 7400 Balance Sheet Accumulated Cost Depreciation Book Value 41000 41000 74001 33600 41000 14800 26200 41000 222001 18800 41000 29600 11400 41000 37000 4000

Units of Activity Method Annual Depreciation : Depreciable Value / Life Depreciation Per unit : 37000/10000 3.70 Income Statement Depreciation Expenses Year At Acquissition 7400 11100 7400 7400 3700 Balance Sheet Accumulated Cost Depreciation Book Value 41000 41000 7400 33600 41000 18500 22500 41000 25900 15100 41000 33300 7700 41000 370001 4000

Year Double Declining balance Method Rate of Depreciation = (1/Life 2 Depreciation Rate = (1/5)*2 40.0% Double Declining balance Method Book Value Depreciation % Depreciation Book value 1 410001 40% 16400124600 24600 40% 984014760 14760 40% 59041 88561 8856 40% 3542 5314 5314 25% 1314 4000 2 3 4 5 Income Statement Balance Sheet Depreciation Accumulated Year Expenses Cost Depreciation Book Value At Acquissition 41000 11 16400 41000 16400 246001 2 984041000 2624014760 3 5904 41000 321441 8856 4 35421 41000 35686 5314L 1314 41000 37000 4000 Straight Which Method will result in the highest net income in year 2 Line Method Does the Machine was used efficiency under this method NO