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Evaluate each method in terms of its effect on cash flows

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Reference no: EM13496938

You are a financial analyst for your company and have been asked to determine the impact of various depreciation methods on the company's financial statements. Your analysis is based on a machine costing $110,000 with an estimated useful life of 12 years and an estimated residual value of $8,000. The machine also has an estimated useful life in output of 220,000 units. Actual output was 21,000 units in year 1 and 15,000 units in year 2.

Required:

  1. For years 1 and 2, prepare depreciation schedules (round all results to the nearest dollar) for the asset assuming:
    1. Straight-line method
    2. Units-of-production method
    3. Double-declining-balance method

 

Year

Computation

Depreciation Expense

Accumulated Depreciation

Net Book Value

Straight-line:

Acquisition

 

 

 

 

Year 1

 

 

 

 

Year 2

 

 

 

 

Units-of-production:

Acquisition

 

 

 

 

Year 1

 

 

 

 

Year 2

 

 

 

 

Double-declining-balance:

Acquisition

 

 

 

 

Year 1

 

 

 

 

Year 2

 

 

 

 
  1. Evaluate each method in terms of its effect on cash flows, fixed asset turnover, and earnings per share. Assuming that the company is most interested in maintaining a high EPS during year 1 and 2, which method would you recommend? Assuming that the company is most interested in reducing taxes during year 1 and 2, which method would you recommend?

Reference no: EM13496938

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