Question

Solar Innovations Corporation bought a machine at the beginning of the year at a cost of $25,000. The estimated useful life was five years and the residual value was $3,000. Assume that the estimated productive life of the machine is 10,000 units. Expected annual production was year 1, 2,000 units; year 2, 3,000 units; year 3, 2,000 units; year 4, 2,000 units; and year 5, 1,000 units. Required: Complete a depreciation schedule for each of the alternative methods. a. Straight-line. b. Units-of-production. c. Double-declining-balance. Which method will result in the highest net income in year 2

Answer 1

The straight line depreciation will result in highest net income in year 2.

Step-by-step explanation:

a. Straight Line:

( Cost - residual value ) / useful life

( $25,000 - $3,000 ) 5

Depreciation = $4,400

b. Units of production:

( cost * annual production ) / Total expected production over life

Year 1: $25,000 * 2,000 units / 10,000 units = $5,000

Year 1: $25,000 * 3,000 units / 10,000 units = $7,500

c. Double declining balance:

100% / 5 years = 20% * 2 = 40%

Year 1: $25,000 * 40% = $10,000

Year 2: $15000 * 40% = $6,000