Question

Freer Co. purchased a piece of machinery for $50,000. Freer will use the machinery in the production of its product line for five years, at which time the machinery will have a residual value of $5,000. Freer anticipates that it will produce 90,000 units the first year with total units of 450,000. Which of the following methods will allow Freer to claim the greatest amount of depreciation in the first year?

a. Straight line
b. Sum-of-the-years digits
c. Double declining balance
d. Units of production

Answer 1

c. Double declining balance

Step-by-step explanation:

The double-declining balance method charges a large amount of depreciation in the first year. Double -declining calculates depreciation by doubling the straight-line rate. The rate is multiplied by the declining book value each year.

The asset has a life of 5 years; the straight-line rate is 20%; the double-declining rate will be 40%. The 40% rate will be applied against the cost of the asset to get depreciation for the first year.

Since the cost of the asset is uniform for all methods in the first year, the double-declining method will give the double amount the straight-line method. The units of production will charge the same amount in all the five years since the machine will produce the same units in each year.