Alladin Company purchased Machine #201 on May 1, 2012. The following information relating to Machine #201 was gathered at the end of May.
Price …………………………………………………………$85,000
Credit terms ……………………………………………….2/10, n/30
Freight-in costs ………………………………………………...$ 800
Preparation and installation costs ……………………………$ 3,800
Labor costs during regular production operations …………..$10,500
It was expected that the machine could be used for 10 years, after which the salvage value would be zero. Alladin intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,500. The invoice for Machine #201 was paid May 5, 2012. Alladin uses the calendar year as the basis for the preparation of financial statements.
Instructions
(a) Compute the depreciation expense for the years indicated using the following methods. (Round to the nearest dollar.)
(1) Straight-line method for 2012.
(2) Sum-of-the-years’-digits method for 2013.
(3) Double-declining-balance method for 2012.
(b) Suppose Kate Crow, the president of Alladin, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will allocate less of the company’s depreciation expense to the early years and more to later years of the assets’ lives. What method would you recommend?