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 |
AccumulatedDepreciation |
Book Value |

$ | |||

1 | $ | $ | |

2 | |||

3 |

b. The double-declining-balance method:

End of Year |
DepreciationExpense |
AccumulatedDepreciation |
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.

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