Question

Solar Innovations Corporation bought a machine at the beginning of the year at a cost of $22,000. The estimated useful life was five years and the residual value was $2,000. Assume that the estimated productive life of the machine is 10,000 units. Expected annual production was year 1, 2,000 units; year 2, 3,000 units; year 3, 2,000 units; year 4, 2,000 units; and year 5, 1,000 units. Required: 1. Complete a depreciation schedule for each of the alternative methods. a. Straight-line. b. Units-of-production c. Double-declining-balance. 2. Which method will result in the highest net income in year 2? Does this higher net income mean the machine was used more efficiently under this depreciation method? Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 1C Req 2A Req 2B Complete a depreciation schedule for Straight-line method. (Do not round intermediate calculations.) Income Balance Sheet Statement Depreciation Expense Accumulated Year Cost Book Value Depreciation At acquisition 2.

Answer 1

Hello,

(1) Here are the depreciation schedules :

STRAIGHT LINE METHOD
Depreciation = (Cost - residual value)/Useful life
Cost	22000	a
Residual value	2000	b
Useful life	5	c
Depreciation	4,000.00	(a-b)/c
	Income Statement	Balance Sheet
Year	Depreciation expense	Cost	Accumulated depreciation	Book value
At acquisition				22,000.00
1	4,000.00	22,000.00	4,000.00	18,000.00
2	4,000.00	22,000.00	8,000.00	14,000.00
3	4,000.00	22,000.00	12,000.00	10,000.00
4	4,000.00	22,000.00	16,000.00	6,000.00
5	4,000.00	22,000.00	20,000.00	2,000.00

UNITS OF PRODUCTION METHOD
Depreciation = [(Cost - residual value)/estimated total units to be produced over useful life] * Actual units produced
Cost	22000	d
Residual value	2000	e
Estimated total units to be produced over useful life	10000	f
	g	[(d-e)/f]*g
Years :	Units	Depreciation expenses
1	2000	4,000.00
2	3000	6,000.00
3	2000	4,000.00
4	2000	4,000.00
5	1000	2,000.00
	Income Statement	Balance Sheet
Year	Depreciation expense	Cost	Accumulated depreciation	Book value
At acquisition				22,000.00
1	4,000.00	22,000.00	4,000.00	18,000.00
2	6,000.00	22,000.00	10,000.00	12,000.00
3	4,000.00	22,000.00	14,000.00	8,000.00
4	4,000.00	22,000.00	18,000.00	4,000.00
5	2,000.00	22,000.00	20,000.00	2,000.00
DOUBLE DECLINING BALANCE METHOD
Depreciation = 2 * Straight Line Depreciation percent * Opening Book Value
Straight Line Depreciation percent =		20%	(4,000/20,000)
	Income Statement	Balance Sheet
Year	Depreciation expense **	Cost	Accumulated depreciation	Book value
At acquisition				22,000.00
1	8,800.00	22,000.00	8,800.00	13,200.00
2	5,280.00	22,000.00	14,080.00	7,920.00
3	3,168.00	22,000.00	17,248.00	4,752.00
4	1,900.80	22,000.00	19,148.80	2,851.20
5	851.20	22,000.00	20,000.00	2,000.00
Calculation **
Year 1 depreciation	2*22,000*20%
Year 2 depreciation	2*13,200*20%
Year 3 depreciation	2*7,920*20%
Year 4 depreciation	2*4,752*20%
Year 5 depreciation	(2*2,851.20*20%) - 289.28	I have adjusted the depreciation expense of Year-5 to keep the salvage value as estimated.

(2)

Year-2
Depreciation expenses
SL method	4,000.00
Units of production method	6,000.00
Double declining balance	5,280.00

As depreciation under Straight line method is the lowest among the above, Straight Line method will result in the highest net income in Year-2.

Higher net income would mean low depreciation charged on the machine. Hence it doesn't indicate a more efficient usage. If the machine was used more efficiently, depreciation charged would have been accelerated rather than being lower, resulting in a decreased net income.

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Thanks and have a great day !