Question

Solar Innovations Corporation bought a machine at the beginning of the year at a cost of $42,000. The estimated useful life was five years and the residual value was $5,000. Assume that the estimated productive life of the machine is 20,000 units. Expected annual production was year 1, 4,500 units; year 2, 5,500 units; year 3, 4,500 units; year 4, 4,500 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

Depreciation schedule for :

Straight-line Units-of-production Double-declining-balance

Year 1 $ 7,400 $8,325 $16,800

Year 2 $ 7,400 $10,175 $10,080

Year 3 $ 7,400 $8,325 $6,048

Year 4 $ 7,400 $8,325 $3,629

Year 5 $ 7,400 $1,850 $2,177

Straight Line Method will result in the highest Net Income. This is because it provides for the lowest charge of depreciation expense

Step-by-step explanation:

Straight-line

Straight line method charges the same amount of depreciation (fixed on cost) over the useful life of an asset.

Depreciation Charge = (Cost - Residual Value) ÷ Estimated Useful Life

= ($42,000 - $5,000) ÷ 5

= $ 7,400

Annual Straight line Depreciation Charge

Year 1 = $ 7,400

Year 2 = $ 7,400

Year 3 = $ 7,400

Year 4 = $ 7,400

Year 5 = $ 7,400

Units of Production

Depreciation Charge = (Cost - Residual Value) / Total Expected Production × Period`s Production

Therefore,

Depreciation Charge = Rate of depreciation × Period`s Production

then,

Rate of depreciation = ($42,000 - $5,000) / 20,000 units

= $1.85 per unit of production

Annual Units of Production Deprecation Charge

Year 1 = 4,500 units × $1.85 = $8,325

Year 2 = 5,500 units × $1.85 = $10,175

Year 3 = 4,500 units × $1.85 = $8,325

Year 4 = 4,500 units × $1.85 = $8,325

Year 5 = 1,000 units × $1.85 = $1,850

Double-declining-balance.

Depreciation Expense = 2 × SLDP × BVSLDP

Where,

SLDP = 100 ÷ Number of useful life

= 100 ÷ 5

= 20 %

Annual Double-declining-balance Expense

Year 1 = 2 × 20% × $42,000

= $16,800

Year 2 = 2 × 20% × ($42,000 - $16,800)

= $10,080

Year 3 = 2 × 20% × ($42,000 - $16,800 - $10,080)

= $6,048

Year 4 = 2 × 20% × ($42,000 - $16,800 - $10,080 - $6,048)

= $3,629

Year 5 = 2 × 20% × ($42,000 - $16,800 - $10,080 - $6,048- $3,629)

= $2,177