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Depreciation Methods

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6-24.) Problem 6-24 Purchase and use of tangible asset: three accounting cycles, double declining -balance depreciation

The following transactions pertain to Optimal Solutions Inc. Assume the transactions for the purchase of the computer and any capital improvements occur on January 1 each year.

2012
1. Acquired $60,000 cash from the issue of common stock.
2. Purchased a computer system for $25,000 cash. It has an estimated useful life of five years and a $3,000 salvage value.
3. Paid $1,500 sales tax on the computer system.
4. Collected $35,000 in data entry fees from clients.
5. Paid $1,200 in fees to service the computers.
6. Recorded double-declining-balance depreciation on the computer system for 2012.
7. Closed the revenue and expense accounts to Retained Earnings at the end of 2013.

2013
1. Paid $8,000 for repairs to the computer system.
2. Bought a case of toner cartridges for the printers that are part of the computer system, $1,200.
3. Collected $38,000 in data entry fees from clients.
4. Paid $9,00 in fees to service the computers.
5. Recorded double-declining-balance depreciation for 2013.
6. Closed the revenue and expense accounts to Retained Earnings at the end of 20013.

2014
1. Paid $3,000 to upgrade the computer system, which extended the total life of the system to six years.
2. Paid $9,000 in fees to service the computers.
3. Collected $35,000 in data entry fees from clients.
4. Recorded double-declining-balance depreciation for 2014.
5. Closed the revenue and expense accounts for 2014.

Required
a. Record the above transaction in horizontal statements model.

6-28.) Determining the effect of depreciation expense on financial statements

Three different companies each purchased a machine on January 1, 2012, for $54,000. Each machine was expected to last five years or 200,000 hours. Salvage value was estimated to be $4,000. All three machines were operated for 50,000 hours in 2012, 55,000 hours in 2013, 40,000 hours in 2014, 44,000 hours in 2015, and 31,000 hours in 2016. Each of the three companies earned $30,000 of cash revenue during each of the five years. Company A uses straight-line depreciation, company B uses double-declining-balance depreciation, and company C uses units-of-production depreciation.

Required
Answer each of the following questions. Ignore the effects of income taxes.
a. Which company will report the highest amount of net income for 2012?
b. Which company will report the lowest amount of net income for 2014?
c. Which company will report the highest book value on December 31, 2014, balance sheet?
d. Which company will report the highest amount of retained earnings on December 31, 2015 balance sheet?
e. Which company will report the lowest amount of cash flow from operating activities on the 2014 statement of cash flows?

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Solution Summary

Depreciation Methods: - Double Declining Balance, Units of Production, Straight Line

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