Torge Company bought a machine for $78,000 cash. The estimated useful life was f

Question

Torge Company bought a machine for $78,000 cash. The estimated useful life was five years and the estimated residual value was S6,000. Assume that the estimated useful life in productive units is 168,000 Units actually produced were 44,800 in year 1 and 50,400 in year 2 Required 1. Determine the appropriate amounts to complete the following schedule. (Do not round intermediate calculations.) Depreciation Expense for Book Value at the End of Year 2 Year 1 Method of Depreciation Straight-line Units-of-production Double-declining-balance Year 1 Year 2 2-a. Which method would result in the lowest net income for year 1? O straight-line Units-of-production Double-declining-balance 2-b. Which method would result in the lowest net income for year 2? O Units-of-production Double-declining-balance 0 Straight-line 3. Which method would result in the lowest fixed asset turnover ratio for year 1? O Straight-line Units-of-production Double-declining-balance

Explanation / Answer

Answer 1

Note :

Dep as per SLM = (Cost - Residual value ) / Estimated useful life = ($78,000 - $6,000) / 5 yrs = $14,400 per year

Dep as per Unit of Producton method = [(Cost - Residual value ) / Estimated life in units ] * Yealy production

Dep as per DDB method = 2 * SLM rate * Book Value at th beginning of year;

where SLM rate = 1 / estimated useful life = 1 /5 = 20 %

Answer

Answer 2 a

Double decline balance

Reason : Highest dep , lowest net income

Answer 2 b

Units of Production

Reason : Highest dep , lowest net income

Answer 3

Straight Line

Reason ; High book value of fixed assets results in low fixed assets turnover ratio.

Depreciation Expense for Book Value at the end of Method of Depreciation Year 1 Year 2 Year 1 Year 2 Straight Line $14,400 $14,400 ($78,000 - $14,400) = $63,600 ($63,600 - $14,400) = $49,200 Units of Production $19,200 $21,600 $78,000 - $19,200) = $58,800 ($58,800 - $21,600) = $37,200 Double decline balance $31,200 $18,720 ($78,000 - $31,200) = $46,800 ($46,800 - $18,720) = $28,080

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