Response to the following problem:
Stahn Inc., an oil production company, purchased a machine on April 1, 2016. The following information applies:
Estimated useful life 3 years (100,000 tonnes)
Residual value $4,000
The machine has an estimated useful life in production output of 100,000 tonnes. Actual output was: 2016 - 40,000 tonnes; 2017 - 20,000 tonnes; 2018 - 10,000 tonnes. The year-end of the company is December 31. Assume the company uses the ½ year rule to calculate depreciation expense in the year of acquisition and disposal.
1. Calculate the depreciation expense and the carrying amount at year-end for the three-year period under each of these depreciation methods: straight-line, double-declining balance, and usage.
2. Assume depreciation has been recorded based on machine usage as calculated above. The machine is obsolete at the end of three years and must be sold, even though the president believes that it could have been used to process an additional 30,000 tonnes of output. He thinks that too little depreciation expense has been charged against income during the three years and that the company has therefore issued inaccurate financial statements. Do you agree? Why or why not?