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On January 6 2013, Abood Inc. paid $320,000 for a computer system. In addition to the basic purchase price, the company paid a setup fee of $2,500, $6,400

sales tax, and $21,100 for special installation. Management estimates that the computer will remain in service for five years and have a residual value of $20,000.

The computer will process 50,000 documents the first year, decreasing annually by 5,000 during each of the next four years (that is 45,000 documents in 2014, 40,000

documents in 2015, and so on). In trying to decide which depreciation method to use, the company president has requested a depreciation schedule for each of three depreciation methods (straight-line, units-of-production, and double-diminishing-balance).

Requirement 1. Prepare a depreciation schedule for each of the three depreciation methods listed, showing asset cost, depreciation expense, accumulated depreciation, and asset carrying amount.

Before completing the straight-line depreciation schedule, calculate the straight-line depreciation rate. First, enter the formula and then compute the rate. (Round the rate to two decimal places.)

	/		=	(SL) Depreciation Rate
	/		=

Complete the Straight-Line Depreciation Schedule. Begin by filling out the schedule through

20142014,

and then complete the schedule by entering the amounts through

20172017.

(Enter the rate to two decimal places. Round all other amounts to the nearest whole dollar.)

Straight-Line Depreciation Schedule
		Depreciation for the Year
	Asset	Depreciation	Depreciable	Depreciation	Accumulated	Asset
Date	Cost	Rate	Cost	Expense	Depreciation	Book Value
January 6, 2013
December 31, 2013
December 31, 2014

December 31, 2015
December 31, 2016
December 31, 2017

Before completing the units-of-production depreciation schedule, calculate the depreciation expense per unit. First, enter the formula and then compute the rate. (Round the rate to the nearest cent.)

								Depreciation per unit
(		-		)	/		=	of output
(		-		)	/		=

Complete the Units-of-Production Depreciation Schedule. Begin by filling out the schedule through

2014, and then complete the schedule by entering the amounts through 2017.

(Enter depreciation per unit to the nearest cent. Round all other amounts to the nearest whole dollar.)

Units-of-Production Depreciation Schedule
		Depreciation for the Year
	Asset	Depreciation	Number of	Depreciation	Accumulated	Asset
Date	Cost	Per Unit	Units	Expense	Depreciation	Book Value
January 6, 2013
December 31, 2013
December 31, 2014

December 31, 2015
December 31, 2016
December 31, 2017

Before completing the double-diminishing-balance schedule, calculate the double-diminishing-balance rate. First, enter the formula and then compute the rate. (Round the rate to two decimal places.)

	x		=	DDB rate
	x		=

Complete the Double-Diminishing-Balance Depreciation Schedule. Begin by filling out the schedule through 2014, and then complete the schedule by entering the amounts through 2017.

(Enter the rate to two decimal places. Round all other amounts to the nearest whole dollar.)

Double-Diminishing-Balance (DDB) Depreciation Schedule
		Depreciation for the Year
	Asset	DDB	Asset	Depreciation	Accumulated	Asset
Date	Cost	Rate	Book Value	Expense	Depreciation	Book Value
January 6, 2013
December 31, 2013
December 31, 2014

December 31, 2015
December 31, 2016
December 31, 2017

Requirement 2.

Abood Inc. reports to shareholders and creditors in the financial statements using the depreciation method that maximizes reported income in the early years of asset use. Consider the first year

Abood Inc. uses the computer system. Identify the depreciation method that meets the company's objectives. Discuss the advantages of each depreciation method.

The depreciation method that maximizes reported income in the first year of the computer's life is the

DOUBLE DIMINISHING BALANCE / STRAIGHT LINE / UNITS OF PRODUCTION method, which produces the lowest depreciation for that year. The straight-line method allocates the cost of the asset EVENLY / UNEVELY over its estimated useful life.

The units-of-production method would allocate LITTLE / MOST of the cost of the asset to each of the documents produced. This method would match COST TO AMORTIZATION / COST TO REVENUE / EXPENSE TO COST / EXPENSE TO REVENUE.

The double-diminishing-balance method would allocate LITTLE / MOST of the cost of the asset to the BEGINNING / END of its useful life when the computer would be at its LEAST / MOST useful and competitive stage. If the estimated life is LESS / MORE than anticipated due to a LESS / MORE efficient computer being developed, this would be the most appropriate depreciation method. This method would minimize income as it produces the highest depreciation for the year.

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