Comparing Three Depreciation Methods

Waylander Coatings Company purchased waterproofing equipment on January 6 for $682,800. The equipment was expected to have a useful life of four years, or 7,200 operating hours, and a residual value of $56,400. The equipment was used for 2,700 hours during Year 1, 2,200 hours in Year 2, 1,300 hours in Year 3, and 1,000 hours in Year 4.

Required:

1. Determine the amount of depreciation expense for the years ended December 31, Year 1, Year 2, Year 3, and Year 4, by (a) the straight-line method, (b) the units-of-output method, and (c) the double-declining-balance method. Also determine the total depreciation expense for the four years by each method.

Note: FOR DECLINING BALANCE ONLY, round the multiplier to four decimal places. Then round the answer for each year to the nearest whole dollar.

Depreciation Expense

Year Straight-Line Method Units-of-Output Method Double-Declining-Balance Method

Year 1 $---------------------- $------------------------ $--------------------------

Year 2 $---------------------- $------------------------ $---------------------------

Year 3 $---------------------- $------------------------ $---------------------------

Year 4 $---------------------- $------------------------ $---------------------------

Total $---------------------- $------------------------ $---------------------------

2. What method yields the highest depreciation expense for Year 1?

----------------------------

3. What method yields the most depreciation over the four-year life of the equipment?

----------------------------

Cash to Monthly Cash Expenses Ratio

Amicus Therapeutics, Inc., is a biopharmaceutical company that develops drugs for the treatment of various diseases, including Parkinson’s disease. Amicus Therapeutics reported the following financial data (in thousands) for three recent years:

a. Determine the monthly cash expenses for Year 3, Year 2, and Year 1 (in thousands).

b. Determine the ratio of cash to monthly cash expenses for Year 3, Year 2, and Year 1 as of December 31. Round to one decimal place.

c. Based on (a) and (b), which of the following statements is correct.

Computing Straight-Line and Double-Declining-Balance Depreciation

On January 2, Haskins Company purchases a laser cutting machine for use in fabrication of a part for one of its key products. The machine cost $112,000, and its estimated useful life is five years, after which the expected salvage value is $7,000. Compute depreciation expense for each year of the machine's useful life under each of the following depreciation methods:

Note: Round answers to the nearest whole number, when applicable.

a. Straight-line

b. Double-declining-balance

King Fisher Aviation is evaluating an investment project with the following case flows:

year 1 $6,000:

year 2 $5,500:

year3 $7,000:

year 4 $8,000

Discount rate 14 percent What is the discounted payback period for these cash flows if the initial cost is 15,000? What if the initial cost is $12,000? What if the cost is $16,000?

I need all 4 years with the discount rate at 14% and with the different initial costs.

Equipment costing $540,000 with an expected useful life of 10 years and an expected salvage value of $40,000, was purchased at the beginning of the year.

Calculate the depreciation expense for the first five years using:

(a) Sum-of-the-years' digits method. Do not round until final calculation. Round answers to the nearest whole number.

(b) Double-declining balance method (without straight-line switchover). Do not round until final calculation. Round answers to the nearest whole number.

Walsh Company manufactures and sells one product. The following information pertains to each of the company’s first two years of operations:

During its first year of operations, Walsh produced 50,000 units and sold 40,000 units. During its second year of operations, it produced 40,000 units and sold 50,000 units. The selling price of the company’s product is $83 per unit.

Assume the company uses variable costing. Compute the unit product cost for year 1 and year 2.

Prepare an income statement for Year 1 and Year 2.

Assume the company uses absorption costing. Compute the unit product cost for Year 1 and Year 2. (Round your intermediate calculations and final answers to 2 decimal places.)

Prepare an income statement for Year 1 and Year 2. (Round your intermediate calculations to 2 decimal places.)

Reconcile the difference between variable costing and absorption costing net operating income in Year 1. (Enter any losses or deductions as a negative value. Round your intermediate calculations to 2 decimal places.)

SHOW WORK ON EXCEL: You are considering an investment that will pay you $12,000 the first year, $13,000 the second year, $17,000 the third year, $19,000 the fourth year, $23,000 the fifth year, and $28,000 the sixth year (all payments are at the end of each year). What is the maximum you would be willing to pay for this investment if your opportunity cost is 11%?

Required information

[The following information applies to the questions displayed below.]

Inner Secret T Shirt Company produces and sells one product. The following information pertains to each of the company’s first three years of operations:

Variable costs per unit:     

Manufacturing:     

Direct materials   $   27

Direct labor   $   15

Variable manufacturing overhead   $   5

Variable selling and administrative   $   3

Fixed costs per year:     

Fixed manufacturing overhead   $   600,000

Fixed selling and administrative expenses   $   170,000

During its first year of operations, O’Brien produced 97,000 units and sold 73,000 units. During its second year of operations, it produced 79,000 units and sold 98,000 units. In its third year, O’Brien produced 89,000 units and sold 84,000 units. The selling price of the company’s product is $73 per unit.

Required:

1. Assume the company uses variable costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

2. Assume the company uses variable costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

3. Assume the company uses absorption costing and a FIFO inventory flow assumption (FIFO means first-in first-out. In other words, it assumes that the oldest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

4. Assume the company uses absorption costing and a LIFO inventory flow assumption (LIFO means last-in first-out. In other words, it assumes that the newest units in inventory are sold first):

a. Compute the unit product cost for Year 1, Year 2, and Year 3.

b. Prepare an income statement for Year 1, Year 2, and Year 3.

Calculate the accumulated value at time 5 years of payments that are received continuously over each year with payment of $100 during 1st year, $110 in 2nd year, $130 in 3rd year, $140 in 4th year and $200 in 5th year. Assume EAR = 5%.

In year 1, GSL Corp,'s alternative minimum tax base was $2,000,000 and its regular tax liability is $350,000.

a. What is GSL's total tax liability for years 1,2,3 and 4 (by year) assuming the following

Year 2: AMT base $600,000: Regular Tax liability $100,000

Year 3: AMT base $500,000: Regular tax liability $160,000

Year 4: AMT base $1,000,000: Regular tax liability $150,000

Total Tax Liability

Year 1

Year 2

Year 3

Year 4