Whitley purchased machinery on January 1, 2012, at a cost of $450,000. The machinery’s estimated useful life is four years or 350,000 units, with a residual value of $12,500. The machine actually produces 115,000 units in 2012; 95,000 units in 2013; 75,000 units in 2014; and 65,000 units in 2015. The company is considering which depreciation method should be used for financial reporting purposes.
Instructions
(a) Prepare separate depreciation schedules for the life of the machinery using the straight-line and units-of-production methods.
(b) Which method would result in the lower profit for 2012? In the lower total profit over the four-year period?
(c) Which method would result in the lower carrying amount at the end of 2012? In the lower carrying amount at the end of the four-year period?
(d) Which method would result in the lower cash flow for 2012? In the lower total cash flow over the four-year period?
(e) What factors should management consider when deciding on the appropriate depreciation method?
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