Question

The company founder hires us as consultants and asks that we oversee the accounting for new equipment purchased on January 1. The founder wants to know the implications of different depreciation methods and estimates for the company's financial statements. Those statements will be used to attract financing from new investors and creditors. At the end of the equipment's first year in operation, we are given the following Tableau Dashboard. Estimated Useful Life of Purchase Price & Estimated Salvage Assets Value Building Equipment Truck $70,000 $70,000 $60,000 15 years $50,000 $40,000 Years $40,000 $30,000 $30,000 $30,000 $20,000 6 years $10,000 $10,000 4 years $5,000 Building Equipment Truck Purchase Salvage Purchase Salvage Purchase Salvage Price Value Price Value Price Value

Answer 1

Part 1 A

Straight-line method
Choose numerator	/	Choose denominator	=	Annual depreciation expense
Cost minus salvage	/	Estimated useful life (years)	=	Depreciation expense
$30000	/	4	=	$7500

Cost minus salvage = depreciable base = 40000-10000 = 30000

Part 1 B

Units-of-production depreciation
	Choose numerator	/	Choose denominator	=	Annual depreciation expense
	Cost minus salvage	/	Total estimate units of production		Depreciation expense per unit
	$30000	/	120000		$0.40
Year	Annual production (units)		Deprecation expense
1	35000		$14000

Total estimated production = 35000+55000+25000+5000 = 120000

Part 1 C

	Depreciation for the period			End of period
Annual period	Beginning of period book value	Deprecation rate (%)	Depreciation expense	Accumulated depreciation	Book value
First year	40000	50%	20000	20000	20000

Deprecation rate = 1/ estimated life * 2 = ¼ *2 = 50%

End period book value = beginning book value – depreciation expense

Part 2

Which method in part 1 results in the highest net income in the first year

Straight-line method

The method with the lowest depreciation expense will give the highest net income.

Part 3

Which method would we recommend the company use?

Units of production method

Because according this method, the equipment will be depreciated in the proportion of units produced. It will help to derive fair amount of depreciation.

Part 4

Which method would result in the highest amount of depreciation over an asset’s useful life?

Double-declining balance method

Because it ignores the salvage value.