4) The White Swan Talc Company paid $120,000 for mining equipment for a small ta
ID: 1136522 • Letter: 4
Question
4) The White Swan Talc Company paid $120,000 for mining equipment for a small talc mine. The mining engineer's report indicates the mine contains 40,000 cubic meters of commercial quality talc. The company plans to mine all the talc in the next 5 years as follows: Year Talc Production (m) 15000 11000 4000 6000 4000 Compute the estimated present worth of the total recovery values if the Unit- of-Production (UOP) and the Sum-of-the-Years Digits (SOYD) depreciation methods are selected. Which method would you recommend that the company adopt? Assume an 8% interest rate.Explanation / Answer
Solution:
1) Sum-of-years’-digits
Year
SYD
Depreciation
Balanced amount
1
5
40,000
80,000
2
4
32,000
48,000
3
3
24,000
24,000
4
2
16,000
8,000
5
1
8,000
0
15
120,000
2) Unit-of-production depreciation
year
SYD
Depreciation
Balanced amount
1
15,000
45,000
75,000
2
11,000
33,000
42,000
3
4,000
12,000
30,000
4
6,000
18,000
12,000
5
4,000
12,000
0
40,000
120,000
Although the total depreciation amount is identical no matter which depreciation method is applied - the choice of depreciation method only alters the timing of depreciation recognition. As the asset depreciates more quickly or has higher production capacity in its earlier years compared to as it does as it ages thus Sum-of-years’-digits is recommended
Year
SYD
Depreciation
Balanced amount
1
5
40,000
80,000
2
4
32,000
48,000
3
3
24,000
24,000
4
2
16,000
8,000
5
1
8,000
0
15
120,000
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