Purpose: This exercise will allow you to practice using various depreciation methods and it will also give you the opportunity to compare the results of using one method to the results of using another method.
On January 1, 2014, Irish Company, a machine-tool manufacturer, acquires a piece of new industrial equipment for $1,000,000. The new equipment has a useful life of five years and the salvage value is estimated to be $100,000. Irish estimates that the new equipment can produce a total of 40,000 units and expects it to produce 10,000 units in its first year. Production is then estimated to decline by 1,000 units per year over the remaining useful life of the equipment.
The following depreciation methods may be used:
· Double declining-balance
· Straight-line
· Sum-of-the-years'-digits
· Units-of-output
Instructions
(a) Identify which depreciation method would result in the maximization of profits for financial statement reporting for the three-year period ending December 31, 2016. Prepare a schedule showing the amount of accumulated depreciation at December 31, 2016, under the method selected. Show supporting computations in good form. Ignore present value and income tax considerations in your answer.
(b) Identify which depreciation method would result in the minimization of profits for the three-year period ending December 31, 2016. Prepare a schedule showing the amount of accumulated depreciation at December 31, 2016, under the method selected. Show supporting computations in good form. Ignore present value and income tax considerations in your answer.