On January 1, 2016, Locke Company, a small machine-tool manufacturer, acquired a piece of new industrial equipment for $1,260,000. The new equipment had a useful life of five 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) Unit of output.
Instructions
(a) Which depreciation method would maximize net income for financial statement reporting for the three-year period ending December 31, 2018? Prepare a schedule showing the amount of accumulated depreciation at December 31, 2018, under each method to support the method selected. Ignore present value, income tax, and deferred income tax considerations.
(b) Which depreciation method would minimize net income for the three-year period ending December 31, 2018? Determine the amount of accumulated depreciation at December 31, 2018. Ignore present value considerations.