Question

Solar Innovations Corporation bought a machine at the beginning of the year at a cost of $31,000. The estimated useful life was five years and the residual value was $3,000. 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:
a. Which method will result in the highest net income in year 2?
b. Does this higher net income mean the machine was used more efficiently under this depreciation method?

Answer 1

Answer:

Straight line depreciation

no

Explanation:

Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

(31,000 - 3000) / 5 = $5,600

depreciation expense each year is 5600

Activity method based on output = (output produced that year / total output of the machine) x (Cost of asset - Salvage value)

(3000 / 10,000) x (31,000 - 3000) = 8400

Double declining =  

Depreciation expense using the double declining method = Depreciation factor x cost of the asset

2/5 x 31000 = 12400

year 2 = 2/5 x(31,000 - 12400) = 7440