Question

Torge Company bought a machine for $62,000 cash. The estimated useful life was five years and the estimated residual value was $8,000. Assume that the estimated useful life in productive units is 174,000. Units actually produced were 46,400 in year 1 and 52,200 in year 2.

Required:

1. Determine the appropriate amounts to complete the following schedule. (Do not round intermediate calculations.)

2-a. Which method would result in the lowest net income for year 1?

A.Units-of-production

B.Straight-line

C.Double-declining-balance

2-b. Which method would result in the lowest net income for year 2?

A.Units-of-production

B.Straight-line

C.Double-declining-balance

Which method would result in the lowest fixed asset turnover ratio for year 1?

A.Units-of-production

B.Double-declining-balance

C.Straight-line

Answer 1

Calculation of Depreciation :-

Units of Production Method :-

Depreciation Per Unit = (Asset Value - Salvage Value) / Production in useful Life

= ($62000 - $8000) / 174000 units

= $0.310345 per unit

Depreciation Expenses in Year 1 = Units Actually Produce in Year 1 * Depreciation Per Unit

= 46400 * $0.310345

= $14400

Depreciation Expenses in Year 2 = Units Actually Produce in Year 1 * Depreciation Per Unit

= 52200 * $0.310345

= $16200

Straight Line Method :-

Calculation of Depreciation per year = (Asset Value - Salvage Value) / Useful Life

= ($62000 - $8000) / 5 years

= $54000 / 5

= $10800

Double Declining Balance Method :-

Depreciation Rate = (100 / useful life) * 200%

= (100 / 5) * 200%

= 40%

Depreciation in Year 1 = Asset Value * Depreciation Rate

= $62000 * 40%

= $24800

Depreciation in Year 2 = (Asset Value - Depreciation in Year 1) * Depreciation Rate

= ($62000 - $24800) * 40%

= $37200 * 40%

= $14880

Method of Depreciation	Depreciation in Year 1	Depreciation in Year 2	Book Value in Year 1	Book Value in Year 2
Units of Production	$14400	$16200	$47600	$31400
Straight line	$10800	$10800	$51200	$40400
Double declining Balance	$24800	$14880	$37200	$22320

2a. In Double Declining Balance Method Lowest net Income for Year 1. Because Depreciation expenses higher than others.

2b. In Units of Production Method Lowest net Income for Year 2. Because Depreciation expenses higher than others.

3. In Straight Line Method lowest fixed asset turnover ratio for year 1. Because book value higher than others.

Turnover Ratio Formula = Net Sale / Total Asset Book Value