Italian Construction Company purchased a new crane for $360,500 at the beginning
ID: 2501229 • Letter: I
Question
Italian Construction Company purchased a new crane for $360,500 at the beginning of year 1. The crane has an estimated residual value of $35,000 and an estimated useful life of six years. The crane is expected to last 10,000 hours. It was used 1,800 hours in year 1; 2,000 hours in year 2; 2,500 hours in year 3; 1,500 hours in year 4; 1,200 hours in year 5; and 1,000 hours in year 6. Compute the annual depreciation and carrying value for the new crane for each of the six years under each of the following methods: straight line, production, and double-declining-balance (round percentage to two decimal places.) If the crane is sold for $250,000 after year 3, what would be the amount of gain or loss under each method? Do the three methods differ in their effect on the company's profitability? Do they differ in their effect on the company's operating cash flows? Explain.Explanation / Answer
Answer No. 1 Annual Depreciation and carrying value
(a) Straight Line Method of Deprecition
Depreciation per annum = (Cost of new crane - Salvage Value ) / useful life
= (360500 - 35000) /6 = 54250
(b) Production method
Depreciation per production hour = ( Cost of crane - Salvage Value ) / Total Production Hours
= (360500 - 35000) /10000 = 32.55
( c ) Double declining balance mathod
Depreciation per for a period = 2 * Staight line depreciation rate * Book value at beginnig of year
Staight line depreciation rate = 1/6
Answer No. 2 Gain or loss on sale of crane after year 3
Answer no. 3
A depreciation expense has a direct effect on company's profitability . The larger the depreciation expense in a given year the lower the company's reported net income i.e its profit . Hence three method of deprecaition differ in thier effect on the company's profitability.
From the perspective of calcualting operating cash flow using indirect method , net income is used and relevant adjustment are made to arrive at the year end operating cash flow . in this case deprecaiton is expected out in the income statement and it is a non - cash expense , it is therefore added back to arrive at correct cash flow . if using direct method for calculating operating cash flow , depreciation is not considered . hence deprecation under different method dont have effect on company 's cash flow.
Straight Line Method Year Book Value at Beginning of year Depreciation Carrying vlaue at end of year 1 $360,500 54250 $306,250 2 $306,250 54250 $252,000 3 $252,000 54250 $197,750 4 $197,750 54250 $143,500 5 $143,500 54250 $89,250 6 $89,250 54250 $35,000Related Questions
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