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Torge Company bought a machine for $74,000 cash. The estimated useful life was five years and the estimated residual value was $5,000. Assume that the estimated useful life in productive units is 165,000. Units actually produced were 44,000 in year 1 and 49,500 in year 2.
Required:
1. Determine the appropriate amounts to complete the following schedule. (Do not round intermediate calculations.)
Depreciation Expense for Depreciation Expense for Book Value at the End of Method of Depreciation Book Value at the End of Method of Depreciation
Method of Depreciation Year 1 Year 2 Year 1 Year 2
Straight-line
Units-of-production
Double-declining-balance
2. Which method would result in the lowest net income for year 1?
3. Which method would result in the lowest net income for year 2?
4. Which method would result in the lowest fixed asset turnover ratio for year 1?

Answer :

Answer:

Straight line depreciation

                Depreciation expense           Book Value at the End of                   Year 1        $13800                                     $60,200  

Year 2       $13800                                     $46,400

Units of production            

              Depreciation expense           Book Value at the End of                      Year 1           $18400                                     $55,600

Year 2          $20,700                                    $34,900

Double declining balance          

             Depreciation expense           Book Value at the End of                  Year 1          $29600                                    $44,400  

Year 2          $17,760                                    $26,640

2. Double-declining-balance

3. Units-of-production

4. Straight-line

Explanation

Straight line depreciation expense = (Cost of asset - Salvage value) / useful life

($74,000 - $5000) / 5 = $13800

Depreciation expense each year would be $13800

Book value = cost of asset - depreciation

Book value in year 1 = $74,000 - $13800 = $60,200    

Book value in year 2 = $60,200 - $13800 = $46,400  

Unit of production = (total output that year / total output of the machine) x  (Cost of asset - Salvage value)

Deprecation expense in year 1 = (44,000 / 165,000) x  ($74,000 - $5000) = $18400

Deprecation expense in year 2 = (49,500 / 165,000) x  ($74,000 - $5000) = $20700

Book value in year 1 = $74,000 - $18,400 = $55,600

Book value in year 2 = $55,600 - $20700 = $34,900

Depreciation expense using the double declining method = Depreciation factor x cost of the asset

Depreciation factor = 2 x (1/useful life)  = 2/5 = 0.4

Deprecation expense in year 1 = 0.4 x $74,000 = $29600

Book value in year 1 = $74,000 - $29600 = $44,400

Deprecation expense in year 2 = 0.4 x $44,400 = $17,760

Book value in year 2 = $44,400 - $17,760 = $26,640

Net income is revenue less cost of goods sold, general expenses, taxes, depreciation and interest.

The method that would yield the lowest net income in year 1 is the method that yields the highest deprecation expense in year 1. This is the double declining method

The Units-of-production would yield the lowest net income in year 2 because it has the highest depreciation expense

Fixed asset turnover = revenue / average net fixed assets

average net fixed assets = cost of asset - accumulated depreciation

the higher the average net fixed asset, the lower the fixed asset turnover. The depreciation method that yields the lowest depreciation expense in year 1 would have the lowest fixed asset turnover ratio. This is the straight line method

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