147. On January 1, 2011, Carter Company purchased a new computer system for $50,000. Management estimates that the computer will have a 5-year life and a salvage value $5,000. Carol Carter, the company president, knows that the computer can be depreciated using either the straight-line method or the double-declining method. She is concerned as to the possible effect on various financial statement analyses if the company uses one method versus the other.
Required: a) In 2011 which method will have the larger negative effect (in other words, the less favorable effect) on each of the following ratios:
Debt to equity ratio
Return on sales (net income/sales)
b) In 2014 which method will have the larger negative effect on each of the following ratios
Debt to equity ratio
Return on sales
148. Sellers Company purchased a new machine on January 1, 2011, at a cost of $300,000. The machine is expected to have an eight-year life and a $30,000 salvage value. The machine is expected to produce 720,000 finished products during its eight-year life. Production during 2011 was 70,000 units and during 2012 was 110,000 units.
Required: Determine the amount of depreciation expense to be recorded on the machine for the years 2011 and 2012 under each of the following methods:
1) Straight-line
2) Units of production
3) Double-declining balance
149. On January 2, 2011, Preston Corporation purchased a delivery truck for $56,000. The estimated useful life of the truck is 5 years, with an estimated salvage value of $8,000. The truck is expected to be driven 200,000 miles during its useful life.
a) If Preston uses double-declining balance depreciation, what is the amount of depreciation for 2012? What is the balance of the accumulated depreciation account at the end of 2012 after adjusting entries have been made?
b) Refer to part a. Assume Preston used DDB depreciation and sold the truck at the beginning of 2013 for $18,000. What is the amount of the gain or loss on the sale of the delivery van?
c) Prepare the journal entry to record the sale in part (b).
d) Assume that Preston used units-of-production depreciation, instead of the DDB in part a. The delivery van was driven 50,000 miles the first year and 40,000 miles the second year. What is the amount of depreciation expense for 2011 and for 2012? What is the book value of the van at the end of 2012?