E9-6 Computing Depreciation under Alternative Methods [LO 9-3] Solar Innovations

Question

E9-6 Computing Depreciation under Alternative Methods [LO 9-3] Solar Innovations Corporation bought a machine at the beginning of the year at a cost of $40,000. The estimated useful life was five years and the residual value was $4,500. Assume that the estimated productive life of the machine is 10,000 units. Expected annual production for year 1, 2,100 units; year 2, 3,100 units; year 3, 2,100 units; year 4, 2,100 units; and year 5, 600 units. Required 1. Complete a depreciation schedule for each of the alternative methods. (Do not round intermediate calculations.) a. Straight-line ncome Balance Sheet Accumulated Depreciation Cost Depreciation Statement Year Book Value Expense At acquisition 2 4 b. Units-of-production. ncome Balance Sheet Statement Depreciation Expense Accumulated Book Value Depreciation Year Cost At acquisition

Explanation / Answer

Solution 1a:

Cost of machine = $40,000

Residual value =$4,500

Deprciable base = $40,000 - $4,500 = $35,500

Life of machine = 5 years

Annual depreciation - SLM = (Original cost - Salvage value) / Life of machine = ($40,000 - $4,500) / 5 = $7,100

Depreciation rate - SLM = $7,100 / ($40,000 - $4,500) = 20%

Solution 1b:

Estimated annual production in life of machine = 10000 units

Depreciation using unit of production method

Year 1 = $35,500 * 2100 / 10000 = $7,455

Year 2 = $35,500 * 3100 / 10000 = $11,005

Year 3 = $35,500 * 2100 / 10000 = $7,455

Year 4 = $35,500 * 2100 / 10000 = $7,455

Year 5 = $35,500 * 600 / 10000 = $2,130

Solution 1c:

Depreciation rate - SLM = 20%

Depreciation rate - Double declining = 40%

Solution 2a:

In year 2, lowest depreciation expense was provided by straight line method hence resulting in to highest net income in year 2.

Solution 2b:

Higer net income does not mean the machine was used for efficiently under this depreciation method.

Depreciation Schdule - Straight Line Method Year Income Statement Balance Sheet Depreciation Expense Cost Accumulated Depreciation Book Value At Acquisition $40,000.00 $40,000.00 1 $7,100.00 $40,000.00 $7,100.00 $32,900.00 2 $7,100.00 $40,000.00 $14,200.00 $25,800.00 3 $7,100.00 $40,000.00 $21,300.00 $18,700.00 4 $7,100.00 $40,000.00 $28,400.00 $11,600.00 5 $7,100.00 $40,000.00 $35,500.00 $4,500.00

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