E9-6 Computing Depreciation under Alternative Methods [LO 9-3] Solar Innovations Corporation bought a machine at the beginning of the year at a cost of $22,000. The estimated useful life was five years and the residual value was $2,000. Assume that the estimated productive life of the machine is 10,000 units. Expected annual production was year 1, 2,000 units; year 2, 3,000 units; year 3, 2,000 units; year 4, 2,000 units; and year 5, 1,000 units. Required: Complete a depreciation schedule for each of the alternative methods. a. Straight-line. b. Units-of-production. Which method will result in the highest net income in year 2

Straight line method result the $14,000 highest net income in 2nd year.

Explanation:

According to the scenario, computation of the given data are as follows:-

Straight Line Method Depreciation Method = (Purchase Value - Residual Value) : Useful Life

= ($22,000 - $2,000) : 5

= $20,000 : 5 = $4,000

Straight Line Method:-

Year Cost ($) Dep. Amount / year Accumulated Dep. Book Value

1 22,000 4,000 4,000 18,000

2 22,000 4,000 8,000 14,000

3 22,000 4,000 12,000 10,000

4 22,000 4,000 16,000 6,000

5 22,000 4,000 20,000 2,000

Unit of Production Method:-

Year Cost Units Calculation Of Dep. Dep. Amount/Year Accumulated Dep. Book Value ($)

1 22,000 2,000 (22,000-2,000) * 2,000:10,000 4,000 4,000 18,000

2 22,000 3,000 (22,000-2,000) * 3,000:10,000 6,000 10,000 12,000

3 22,000 2,000 (22,000-2000) * 2,000:10,000 4,000 14,000 8,000

4 22,000 2,000 (22,000-2,000) * 2,000:10,000 4,000 18,000 4,000

5 22,000 1,000 (22,000-2,000) * 1,000:10,000 2,000 20,000 2,000

Total 10,000

Calculation of Depreciation = (Machine Value - Residual Value) * No. of Unit : Total Unit

Straight line method result the $14,000 highest net income in 2nd year.