You are a financial analyst for your company and have been asked to determine the impact of various depreciation methods on the company's financial statements. Your analysis is based on a machine costing $110,000 with an estimated useful life of 12 years and an estimated residual value of $8,000. The machine also has an estimated useful life in output of 220,000 units. Actual output was 21,000 units in year 1 and 15,000 units in year 2.
Required:
- For years 1 and 2, prepare depreciation schedules (round all results to the nearest dollar) for the asset assuming:
- Straight-line method
- Units-of-production method
- Double-declining-balance method
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Year
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Computation
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Depreciation Expense
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Accumulated Depreciation
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Net Book Value
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Straight-line:
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Acquisition
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Year 1
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Year 2
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Units-of-production:
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Acquisition
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Year 1
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Year 2
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Double-declining-balance:
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Acquisition
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Year 1
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Year 2
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Evaluate each method in terms of its effect on cash flows, fixed asset turnover, and earnings per share. Assuming that the company is most interested in maintaining a high EPS during year 1 and 2, which method would you recommend? Assuming that the company is most interested in reducing taxes during year 1 and 2, which method would you recommend?