HappyDay is planning to invest $20 million and acquire a new production line at the beginning of Year 3. Also, the company has intents to change the depreciation policy in order to manage the costs of production and income tax expenses better. Your new boss asks you to calculate depreciation expenses using straight-line, double-declining balance and units-of-production methods to determine which of the methods is better. The new asset is expected to have a 10-year useful life. The total production is estimated at 500,000 tons. With respect to the new asset, HappyDay is expecting to generate the following results in Years 3-5. Year 3 Year 4 Year 5 Expected amount of production, tons 45,000 65,000 60,000 Net Sales, thousand $ 85,000 120,000 110,000 Expenses (before depreciation and income tax), thousand $ 45,000 80,000 73,000 Income tax rate, % 30 30 30 Answer the following questions: Determine the amount of depreciation expense in each year (Years 3-5) and accumulated depreciation HappyDay would report in the Year 5 financial statements. Use straight-line, double-declining balance and units-of-production methods. 2. Compute HappyDay’s Total Expenses, Income Tax and Net Income in Years 3-5. Prepare the calculations using the depreciation amounts computed according to straight-line, double-declining balance and units-of-production methods. 3. In your opinion, which of the depreciation methods should be used by HappyDay? Explain why.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
HappyDay is planning to invest $20 million and acquire a new production line at the beginning of Year 3. Also, the company has intents to change the
The new asset is expected to have a 10-year useful life. The total production is estimated at 500,000 tons. With respect to the new asset, HappyDay is expecting to generate the following results in Years 3-5.
|
|
Year 3 |
Year 4 |
Year 5 |
|
Expected amount of production, tons |
45,000 |
65,000 |
60,000 |
|
Net Sales, thousand $ |
85,000 |
120,000 |
110,000 |
|
Expenses (before depreciation and income tax), thousand $ |
45,000 |
80,000 |
73,000 |
|
Income tax rate, % |
30 |
30 |
30 |
Answer the following questions:
- Determine the amount of depreciation expense in each year (Years 3-5) and
accumulated depreciation HappyDay would report in the Year 5 financial statements. Use straight-line, double-declining balance and units-of-production methods.
2. Compute HappyDay’s Total Expenses, Income Tax and Net Income in Years 3-5. Prepare the calculations using the depreciation amounts computed according to straight-line, double-declining balance and units-of-production methods.
3. In your opinion, which of the depreciation methods should be used by HappyDay? Explain why.
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