Question

January 1,2016 woff inc. paid $556000 for a computer system. in addition to the basic purchase price, the company paid a setup fee of $4200,$6800 sales tax and $3600 for special installation. management estimates that the computer will remain in service for. five years and have a residual value of $20,000. The computer will process 50,000 documents the first year, decreasing annually by 5,000 during each of the nest four years (that is 45,000 documents in 2017, 40,000 documents in 2018, and so on). In trying to decided which depreciation method to use, the company president has requested a depreciation schedule for each of three depreciation methods (straight- line, units-of-production, and double-declining-balance)

1) prepare a depreciation Schedule for the three depreciation methods listed, showing asset cost, depreciation expense, accumulated depreciation, and asset carrying amount

2)provide a recommendation of which method to use based upon:

a. highest net income year one

b.compliance with accounting standards' requirement that the depreciation method reflects the pattern in which an asset's future economic benefits are expected to be consumed

briefly explain your recommendations

Answer 1

	1.)
	Cost			$       5,70,600
	Life(in years)			5
	Residual Value			$           20,000
	No of Pages			200000
	Depreciation Schedule
	Year/Method	Asset Cost	Straight Line	Balance at End of Year	Accumulated Depreciation
	1	$      5,70,600	$       1,10,120	$       4,60,480	$       1,10,120
	2	$      4,60,480	$       1,10,120	$       3,50,360	$       2,20,240
	3	$      3,50,360	$       1,10,120	$       2,40,240	$       3,30,360
	4	$      2,40,240	$       1,10,120	$       1,30,120	$       4,40,480
	5	$      1,30,120	$       1,10,120	$           20,000	$       5,50,600
	Year/Method	Asset Cost	Double Declining Balance	Balance at End of Year	Accumulated Depreciation
	1	$      5,70,600	$       2,28,240	$       3,42,360	$       2,28,240
	2	$      3,42,360	$       1,36,944	$       2,05,416	$       3,65,184
	3	$      2,05,416	$           82,166	$       1,23,250	$       4,47,350
	4	$      1,23,250	$           49,300	$           73,950	$       4,96,650
	5	$          73,950	$           29,580	$           44,370	$       5,26,230
	Year/Method	Asset Cost	Units of Production	Balance at End of Year	Accumulated Depreciation
	1	$      5,70,600	$       1,37,650	$       4,32,950	$       1,37,650
	2	$      4,32,950	$       1,23,885	$       3,09,065	$       2,61,535
	3	$      3,09,065	$       1,10,120	$       1,98,945	$       3,71,655
	4	$      1,98,945	$           96,355	$       1,02,590	$       4,68,010
	5	$      1,02,590	$           82,590	$           20,000	$       5,50,600
	2.)
	a. Highest Net Income
	Under this situation, Double Declining Balance Method shall be used as it calculates the highest depreciation in the Initial Years which can be recorded against high income
	b. Compliance with Accounting Standards
	Under this situation, units of production method shall be used as it reflects the pattern in which an asset's future economic benefits are expected to be consumed