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 Assets Purchase Price & Estimated Salvage Value

building 15 years, equipment 4 years and truck 6 years

Building Equipment Truck $70,000 $60,000 $50,000 $40,000 Years $30,000 $20,000 $10,000 $0 Purchase Salvage Purchase Salvage Purchase Salvage Price Value Price Value Price Value Building Equipment Truck

Maroon 70,000, Dark Green 30,000, Red 40,000, Green 10,000, Orange 30,000 and Light Green 5,000

Actual & Estimated Units-of-Production

Year 1 Production: $35,000 units

Year 2 Production: $55,000 units

Year 3 Production: $25,000 units

Year 4 Production $5,000 units

1(a). Determine the equipment’s first-year depreciation under the straight-line method.
1(b). Determine the equipment’s first-year depreciation under the units-of-production method. Note: Actual units produced for Year 1 were equal to the units estimated to be produced for Year 1.
1(c). Determine the equipment’s first-year depreciation under the double-declining-balance method.
2. Which method in part 1 results in the highest net income in the first year?
3. If the company anticipates that its use of assets will vary greatly from one year to the next based on usage, which method would we recommend the company use?
4. The founder is concerned that a depreciation method might result in more total depreciation expense over the useful life of an asset than another method. Which method would result in the highest amount of depreciation over an asset’s useful life?

Options for the first box of Choose Numerator

• Beginning book value
• Cost
• Cost minus salvage

Options for the first box Choose Denominator

• Double the SL rate
• Estimated units of production
• Estimated useful life (years)

options for the first box of Choose numerator

• Beginning book value
• Cost
• Cost minus salvage

Option for the first box of Choose Denominator

• Double the SL rate
• Estimated useful life (years)
• Total units of production

Options for this table

Double-declining-balance

Straight-line method

Units-of-production

Options for this table

• Amortization method
• Double-declining-balance method
• Straight-line method
• Units-of-production method

The founder is concerned that a depreciation method might result in more total depreciation expense over the useful life of an asset than another method. Which method would result in the highest amount of depreciation over an asset’s useful life?

Options for this table:

• Double-declining-balance method
• Straight-line method
• The three methods result in the same total depreciation over the asset’s life.
• Units-of-production method

Answer 1

1.a.

Straight Line Method
Choose Numerator	/	Choose Denominator	=	Annual Depreciation Expense
( Purchase Price - Salvage Value )		Estimated Useful Life		Depreciation Expense
$ (40,000 - 10,000)		4 years		$ 7,500

1.b.

Units of Production Depreciation
Choose Numerator	/	Choose Denominator	=	Annual Depreciation Expense
( Purchase Price - Salvage Value )		Total Units to be Produced		Depreciation Expense per Unit
$ (40,000 - 10,000)		125,000 units		$ 0.24
Year		Annual Production		Depreciation Expense
1		35,000 units		$ 8,400

1.c.

	Depreciation for the Period			End of Period
Annual Period	Beginning of Period Book Value	Depreciation Rate	Depreciation Expense	Accumulated Depreciation	Book Value
First Year	$ 40,000	50%	$ 20,000	$ 20,000	$20,000

2. The Straight Line method.

3. Units of Production method.

4. The three methods result in the same total depreciation over the asset's life.