Chapter 9, Problem 9.8BP

(a)

To determine

Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

$\text{Depreciation cost = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}$

Double-declining-balance method: It is an accelerated method of depreciation under which the depreciation declines in each successive year until the value of asset becomes zero. Under this method, the book value (original cost less accumulated depreciation) of the long-term asset is decreased by a fixed rate. It is double the rate of the straight-line depreciation. Use the following formula to determine the annual depreciation:

$\text{Annual depreciation }=\text{ Purchase price }\times \left(\frac{2}{\text{Useful life}}\right)$

To Prepare: the depreciation schedule for machinery using straight line method.

(b)

To determine

the method that would result in the higher reported 2014 income.

(c)

To determine

the method that would result in the lower reported 2014 income.