Clary Jensen Farms purchased power equipment with an expected useful life of four years or 1,000 hours of usage. The equipment was purchased on January 1,2007, for $125,000. It is expected to have a salvage value of $5,000 at the end of four years. During 2007, the equipment was used for 260 hours. Assume that usage for the next three years will be 220 hours, 313 hours, and 207 hours, respectively.
A. Prepare a depreciation schedule for the asset showing the book value and depreciation expense on the asset each year using the straight-line, double-declining balance, and units-of-production methods.
B. Which method would you prefer to use for financial reporting purposes if you were general manager of the company? Which method would you prefer to use for tax purposes? Explain.
C. Which method has the greatest effect on cash flow each year? Why?