On January 1, 2013, Locke Company, a small machine-tool manufacturer, acquired for $1,260,000 a piece of new industrial equipment. The new equipment had a useful life of 5 years, and the salvage value was estimated to be $60,000. Locke estimates that the new equipment can produce 12,000 machine tools in its first year. It estimates that production will decline by 1,000 units per year over the remaining useful life of the equipment.

The following depreciation methods may be used: (1) straight-line, (2) double-declining-balance,

(3) sum-of-the-years'-digits, and (4) units-of-output. For tax purposes, the class life is 7 years. Use the MACRS tables for computing depreciation.

Instructions

(a) Which depreciation method would maximize net income for financial statement reporting for the 3-year period ending December 31, 2015? Prepare a schedule showing the amount of accumulated depreciation at December 31, 2015, under the method selected. Ignore present value, income tax, and deferred income tax considerations.

(b) Which depreciation method (MACRS or optional straight-line) would minimize net income for income tax reporting for the 3-year period ending December 31, 2015? Determine the amount of accumulated depreciation at December 31, 2015. Ignore present value considerations.