Question - On January 1, Year One, the Sanborn Corporation buys a donut maker for $10,000 that has a ten-year estimated life and an estimated residual value of $1,000. The donut maker is expected to produce a total of 100,000 dozen donuts over its life. In Year One, 13,000 dozen are produced and, in Year Two, 11,000 dozen are produced.
a) If the straight-line method of depreciation is applied, what appears in the Year One and in the Year Two financial statements in connection with this donut maker?
b) If the double-declining balance method of depreciation is applied, what appears in the Year One and in the Year Two financial statements in connection with this donut maker?
c) If the units-of-production method of depreciation is applied, what appears in the Year One and in the Year Two financial statements in connection with this donut maker?
d) Based on the answers to the previous questions, what is the fair value of the donut maker at the end of Year Two?
e) Which of these depreciation methods provides the fairest representation of the donut maker and its use?
f) If the donut maker is sold on October 1, Year Three, depreciation must be recorded for the period from the beginning of the year until the sale. What are the two reasons that this recording is necessary?
g) Assume the straight-line method is used, and the donut maker is sold on October 1, Year Three, for $7,100 in cash. What journal entry is recorded for the sale? Assume that the half-year convention is not in use.
h) How is the journal entry in problem 3.g. impacted if the half-year convention is being used for any period of time of less than a full year?