Question

Walnut Ridge Production, Inc., purchased a new computerized video editing machine at a cost of $370,000. The system has a residual value of $55,700 and an expected life of five years.

1. Compute depreciation expense, accumulated depreciation, and book value for the first three years of the machine's life using:

a. The straight-line method:

End of Year	Depreciation Expense	Accumulated Depreciation	Book Value
			$
1	$	$
2
3

b. The double-declining-balance method:

End of Year	Depreciation Expense	Accumulated Depreciation	Book Value
			$
1	$	$
2
3

2. Which method would produce the largest income in the first, second, and third year, respectively, of the asset's life?

Year	Method
First year	SelectStraight-line methodDouble-declining-balance methodItem 21
Second year	SelectStraight-line methodDouble-declining-balance methodItem 22
Third year	SelectStraight-line methodDouble-declining-balance methodItem 23

3. Why might the controller of Walnut Ridge Production be interested in the effect of choosing a depreciation method? Evaluate the legitimacy of these interests.

Answer 1

Answer 1.

Straight-line Method:

Cost of Machine = $370,000
Residual Value = $55,700
Expected Life = 5 years

Annual Depreciation = (Cost of Machine - Residual Value) / Expected Life
Annual Depreciation = ($370,000 - $55,700) / 5
Annual Depreciation = $62,860

Double-declining-balance Method:

Double-declining Depreciation Rate = 2 / Useful Life
Double-declining Depreciation Rate = 2 / 5
Double-declining Depreciation Rate = 40%

Answer 2.

Answer 3.

Controller of Walnut Ridge Production is interested in the effect of choosing a depreciation method for tax benefit. Depreciation decrease the profit earned during the year so that the company has to pay low taxes.