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On January 1, 2015, Indigo Corporation, a small manufacturer of machine tools, acquired new industrial equipment for $1,300,000
On January 1, 2015, Indigo Corporation, a small manufacturer of machine tools, acquired new industrial equipment for $1,300,000. The new equipment had a useful life of five years and the residual value was estimated to be $59,000. Indigo estimates that the new equipment can produce 14,000 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 cia —30%.
♦ (a)
Prepare a schedule showing the amount of accumulated depreciation at December 31, 2017, under straight-line method, double-declining balance method output method. (Round depreciation per unit to 0 decimal places, e.g. 15 and final answer to 0 decimal places, e.g. 1,575.)
2015
2016
2017
Straight-line Double-declining balance Units-of-output
S
Which of the three depreciation methods would maximize net income for financial statement reporting purposes for the three-year
Expert Solution
1) Straight Line Method:
Annual Depreciation Expenses = (Cost of Asset - Salvage Value)/Useful Life of Asset
= ($1,300,000-$59,000)/5
Annual Depreciation Expenses = $248,200
2) Double-Declining Balance Method:
Straight Line Depreciation Rate = 1/Useful Life of Asset*2
= 1/5 * 2
Straight Line Depreciation Rate = 40%
3) Units of Production Method:
Depreciable Amount = Cost of Equipment - Salvage Value
= $1,300,000 - $59,000
Depreciable Amount = $1,241,000
Expected Machine Tools = 14,000+13,000+12,000+11,000+10,000 = 60,000
Depreciation per Machine Tool = $1,241,000/60,000 = $20.68 per Machine Tool
Double-declining Balance Method would maximize net income for financial statement reporting period ending December 31, 2020.
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