Question

On January 2, 2021, Jatson Corporation acquired a new machine with an estimated useful life of five years. The cost of the equipment was $50,000 with an estimated residual value of $6,000.

a-1. Prepare a complete depreciation table under the straight-line method. Assume that a full year of depreciation was taken in 2021.
a-2. Prepare a complete depreciation table under the 200 percent declining-balance method. Assume that a full year of depreciation was taken in 2021.
a-3. Prepare a complete depreciation table under the 150 percent declining-balance with a switch to straight-line when it will maximize depreciation expense. Assume that a full year of depreciation was taken in 2021.

Answer 1

To prepare a depreciation table, use the 200 percent declining-balance method and the 150 percent declining-balance method with a switch to straight-line. The total cost for each method is $8,840. The firm can choose either method based on other considerations.

Step-by-step explanation:

To prepare a complete depreciation table for the 200 percent declining-balance method, we need to calculate the annual depreciation expense and the accumulated depreciation for each year.

Year 2021:

• Depreciation Expense: $50,000 x 2 = $100,000
• Accumulated Depreciation: $100,000

Year 2022:

• Depreciation Expense: ($50,000 - $100,000) x 2 = $-100,000 (Switch to straight-line method)
• Accumulated Depreciation: $100,000

Year 2023-2025:

• Depreciation Expense: ($50,000 - $6,000) / 5 = $8,800
• Accumulated Depreciation: $100,000 + ($8,800 x 3) = $126,400

To prepare a complete depreciation table for the 150 percent declining-balance method with a switch to straight-line, we follow similar steps but with a different depreciation rate.

Year 2021:

• Depreciation Expense: $50,000 x 1.5 = $75,000
• Accumulated Depreciation: $75,000

Year 2022:

• Depreciation Expense: ($50,000 - $75,000) x 1.5 = $-37,500 (Switch to straight-line method)
• Accumulated Depreciation: $75,000

Year 2023-2025:

• Depreciation Expense: ($50,000 - $6,000) / 5 = $8,800
• Accumulated Depreciation: $75,000 + ($8,800 x 3) = $101,400

The total cost of each method of production depends on the depreciation expense and can be calculated using the formula: Total Cost = Cost of Labor + Depreciation Expense. Since the labor cost remains at $40 and the cost of the machine decreases to $50, the total cost for the 200 percent declining-balance method would be $40 + $8,800 = $8,840, and for the 150 percent declining-balance method with the switch to straight-line, it would be $40 + $8,800 = $8,840, as well.

The firm should use the method that results in a lower total cost. In this case, both methods have the same total cost, so the firm can choose either method based on other considerations such as simplicity or preferred accounting practices.