AC 302 CHAPTER 11 QUESTION PROBLEM 12

AC 302 CHAPTER 11 QUESTION PROBLEM 12 
Name				Date		
Instructor				Course		
Intermediate Accounting 14th Edition by Kieso Weygandt and Warfield						
Primer on Using Excel in Accounting by Rex A Schildhouse						
						
11-12 (Depreciation—SL, DDB, SYD, Act., and MACRS) On January 1, 2011, Locke Company, a 						
small machine-tool manufacturer, acquired for				$1,260,000 	a piece of new industrial 	
equipment. The new equipment had a useful life of				5	years, and the salvage value 	
was estimated to be		$60,000 	. Locke estimates that the new equipment can produce			
12,000	machine tools in its first year. It estimates that production will decline by					
1,000	units per year over the remaining useful life of the equipment.					
The following depreciation methods may be used:						
	(1) Straight-line,					
	(2) Double-declining balance,					
	(3) Sum-of-years'-digits, and					
	(4) Units-of-output.					
For tax purposes, the class life is			7	years. Use the MACRS tables for c		
omputing depreciation.						
						
Instructions:						
"(a) Which depreciation method would maximize net income for financial statement reporting for the
      3-year period ending December 31, 2013? Prepare a schedule showing the amount of
       accumulated depreciation at December 31, 2013, under the method selected. Ignore present
       value, income tax, and deferred income tax considerations."						
						
						
						
						
The straight-line method would provide the highest total net income for financial reporting over the three years, as it reports the lowest total depreciation expense. These computations are provided below.						
						
						
						
(1) Straight-line:	Cost		Amount			
Salvage value			Amount			
Depreciable value			Formula			
Life			Number			
Annual depreciation expense			Formula			
						
Year		"Depreciation
Expense"		"Accumulated
Depreciation"		
2011 		Formula		Formula		
2012 		Formula		Formula		
2013 		Formula		Formula		
		Formula				
						
(2) Double-declining balance:						
Year		"Depreciation
Expense"		"Accumulated
Depreciation"		
2011 		Formula		Formula		
2012 		Formula		Formula		
2013 		Formula		Formula		
		Formula				
						
(3) Sum-of-the-years’-digits:						
Year		"Depreciation
Expense"		"Accumulated
Depreciation"		
2011 		Formula		Formula		
2012 		Formula		Formula		
2013 		Formula		Formula		
		Formula				
						
(4) Units-of-output:						
			Year	"Expected
Output"	"Depreciation
Expense"	"Accumulated
Depreciation"
Cost		Amount	2011 	Formula	Formula	Formula
Salvage value		Amount	2012 	Formula	Formula	Formula
Depreciable value		Formula	2013 	Formula	Formula	Formula
Expected life output		Number	2014 	Formula	Formula	
Unit depreciation expense		Formula	2015 	Formula		
			Total units	Formula		
						
"(b) Which depreciation method (MACRS or optional straight-line) would minimize net income for
     income tax reporting for the 3-year period ending December 31, 2011? Determine the amount of
     accumulated depreciation at December 31, 2011. Ignore present value considerations."						
						
						
						
General MACRS method: (Values taken from the MACRS rates schedule.)						
	Total Cost		"MACRS
Rates (%)"		"Depreciation
Expense"	"Accumulated
Depreciation"
2011 	1,260,000 	×	Percentage	=	Formula	Formula
2012 	1,260,000 	×	Percentage	=	Formula	Formula
2013 	1,260,000 	×	Percentage	=	Formula	Formula
					Formula	
						
Optional straight-line method:						
	Total Cost		"Depreciation
Rate"		"Annual
Depreciation"	"Accumulated
Depreciation"
						
2011 	1,260,000 	×	Rate	=	Formula	Formula
2012 	1,260,000 	×	Rate	=	Formula	Formula
2013 	1,260,000 	×	Rate	=	Formula	Formula
					Formula	
						
Enter text answer here.