Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition

EXERCISE 9-3

Purpose:

(L.O. 2) This exercise will allow you to practice using various depreciation methods and it will also give you the opportunity to compare the results of using one method to the results of using another method.

On January 1, 2014, Kinka Company, a manufacturer, acquires for $230,000 a piece of new equipment. The new equipment has a useful life of five years and the salvage value is estimated to be $30,000. Kinka estimates that the new equipment can produce a total of 80,000 units. Kinka expects it to produce 20,000 units in its first year, 18,000 units in its second year, 32,000 units in its third year, and 5,000 units each in its last two years.

The following depreciation methods are being considered:

• Straight-line
• Declining-balance using double the straight-line rate
• Units-of-activity

Instructions

1. Prepare depreciation schedules for the equipment using the following methods:
   • (1) straight-line
   • (2) double-declining-balance
   • (3) units-of-activity

   Each schedule should display the annual depreciation expense for each year of service life and the resulting amounts of accumulated depreciation and book value. Round to the nearest dollar.

2. Identify the depreciation method which would result in the maximization of profits for financial reporting for the three-year period ending December 31, 2016. Explain why.
3. Identify the depreciation method which would result in the highest book value at the end of the third year of service life.
4. Identify the depreciation ...