Alladin Company purchased a large piece of equipment on October 1, 2017. The following information relating to the equipment was gathered at the end of October:
Price ........................................................................ $60,000
Credit terms ............................................................ 2/10, n/30
Engineering costs ......................................................... $4,800
Maintenance costs during regular production operations ............. $8,500
It is expected that the equipment could be used for 12 years, after which the salvage value would be zero. Alladin intends to use the equipment for only 10 years, however, after which it expects to be able to sell it for $3,100. The equipment was delivered on October 1 and the invoice for the equipment was paid October 9, 2017. Alladin uses the calendar year as the basis for the preparation of financial statements. Alladin follows IFRS for financial statement purposes.
Instructions
(a) Calculate the depreciation expense for the years indicated using the following methods. (Round to the nearest dollar.) Round all calculations down to the nearest dollar
1. Straight-line method for 2017
2. Sum-of-the-years'-digits method for 2018
3. Double-declining-balance method for 2017
(b) The CEO of Alladin tells you that the company is interested in maintaining a stable level of income, because it plans to expand in the future and does not want to appear unduly risky to potential lenders. He asks you, the company's newly hired CPA, to recommend a depreciation method that will best achieve this goal. You know that because the equipment is new it should have low repairs and maintenance costs for the next few years. However the repairs and maintenance costs are likely to increase steadily during years 3-10 of the life of the equipment. Which method would you recommend? Explain.