Question

E9-6 Computing Depreciation under Alternative Methods [LO 9-3] Solar Innovations Corporation bought a machine at the beginning of the year at a cost of $22,000. The estimated useful life was five years and the residual value was $2,000. 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. Which method will result in the highest net income in year 2

Answer 1

Answer:

Straight line method result the $14,000 highest net income in 2nd year.

Explanation:

According to the scenario, computation of the given data are as follows:-

Straight Line Method Depreciation Method = (Purchase Value - Residual Value) ÷ Useful Life  

= ($22,000 - $2,000) ÷ 5

= $20,000 ÷ 5 = $4,000

Straight Line Method:-

Year  Cost($)       Dep. Amount/ year    Accumulated Dep. Book Value  

1   22,000               4,000                  4,000                      18,000

2   22,000               4,000                  8,000                      14,000

3   22,000               4,000                  12,000                      10,000

4   22,000               4,000                  16,000                      6,000

5   22,000               4,000                  20,000                      2,000

Unit of Production Method:-

Year  Cost  Units  Calculation Of Dep.    Dep. Amount/Year   Accumulated Dep. Book Value($)  

1     22,000  2,000   (22,000-2,000)×2,000÷10,000  4,000    4,000                  18,000

2    22,000  3,000   (22,000-2,000)×3,000÷10,000 6,000 10,000 12,000

3 22,000 2,000 (22,000-2000)×2,000÷10,000 4,000 14,000 8,000

4 22,000 2,000 (22,000-2,000)×2,000÷10,000 4,000 18,000 4,000

5 22,000 1,000 (22,000-2,000)×1,000÷10,000 2,000 20,000 2,000

Total   10,000    

Calculation of Depreciation = (Machine Value - Residual Value) × No. of Unit ÷ Total Unit

Straight line method result the $14,000 highest net income in 2nd year.