Select your language

Suggested languages for you:
Log In Start studying!
Answers without the blur. Just sign up for free and you're in → Illustration

Q11-12P

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 595

Short Answer

On January 1, 2016, Locke Company, a small machine-tool manufacturer, acquired for $1,260,000 a piece of new industrial equipment. The new equipment had a useful life of 5 years, and the salvage value was estimated to be $60,000. Locke estimates that the new equipment can produce 12,000 machine tools in its first year. It estimates that production will decline by 1,000 units per year over the remaining useful life of the equipment.

The following depreciation methods may be used:

  1. straight-line,
  2. double-declining-balance,
  3. sum-of-the-years’-digits, and
  4. units-of-output. For tax purposes, the class life is 7 years.

Use the MACRS tables for computing depreciation.

Instructions

  1. Which depreciation method would maximize net income for financial statement reporting for the 3-year period ending December 31, 2018? Prepare a schedule showing the amount of accumulated depreciation at December 31, 2018, under the method selected. Ignore present value, income tax, and deferred income tax considerations.
  2. Which depreciation method (MACRS or optional straight-line) would minimize net income for income tax reporting for the 3-year period ending December 31, 2018? Determine the amount of accumulated depreciation at December 31, 2018. Ignore present value considerations.

Answer

The straight-line method would provide the highest total net income for financial reporting over the three years, as it reports the lowest total depreciation expense. The general MACRS method would minimize net income for income tax purposes for this period.

See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1: Meaning of Straight-Line Depreciation

Straight-line depreciation is the simplest way to assess depreciation over time. By allocating identical amounts to the asset's accounting periods over its useful life, it makes the asset's expense predictable along with smoothing net income.

Step 2: (a1) Calculating depreciation using the straight-line method

Year

Depreciation expense

Accumulated Depreciation

2016

$240,000

$240,000

2017

240,000

$480,000

2018

240,000

$720,000

$720,000

Step 3: (a2) Calculating depreciation using the double-declining-balance

Year

Depreciation Expense

Calculation of depreciation expense

Accumulated Depreciation

2016

$504,000

$504,000

2017

302,400

$806,400

2018

181,440

$987,840

Step 4: (a3) Calculating depreciation using the Sum-of-the-years’-digits

Year

Depreciation Expense

Calculation of depreciation expense

Accumulated Depreciation

2016

$400,000

$400,000

2017

320,000

$720,000

2018

240,000

$960,000

$960,000

Step 5: (a4) Calculating depreciation using the Units-of-output

Year

Depreciation Expense

Calculation of depreciation expense

Accumulated Depreciation

2016

$288,000

$288,000

2017

264,000

$552,000

2018

240,000

$792,000

$792,000

Working notes:

Calculating Unit per output value

Step 6: (b) Calculation of General MARCS method

Date

Total Cost

MACRS Rates (%)

Annual Depreciation

Accumulated Depreciation

2016

$1,260,000

14.29

$180,054

$180,054

2017

1,260,000

24.49

308,574

$488,628

2018

1,260,000

17.49

220,374

$709,002

$709,002

Note: Takes rates from the MACRS rates schedule

Optional straight-line method

For the three-year period ending December 31, 2018, the general MACRS approach would have a larger depreciation expenditure ($709,002) than the optional straight-line technique ($450,000). As a result, for this period, the general MACRS technique would minimize net income for tax purposes.

Most popular questions for Business-studies Textbooks

Icon

Want to see more solutions like these?

Sign up for free to discover our expert answers
Get Started - It’s free

Recommended explanations on Business-studies Textbooks

94% of StudySmarter users get better grades.

Sign up for free
94% of StudySmarter users get better grades.