Capitalize long-term asset costs and several depreciation methods

(Learning Objectives 2, 3, & 9) 20–25 min.

On January 4, 2015, Sunbelt Systems, Inc., paid $287,700 for equipment used in manufacturing automotive supplies. In addition to the basic purchase price, the company paid $2,800 transportation charges, $800 insurance for the equipment while in transit,

$25,800 sales tax, and $2,900 for a special platform on which to place the equipment in the plant. Sunbelt Systems, Inc., management estimates that the equipment will remain in service for five years and have a residual value of $40,000. The equipment will produce 60,000 units the first year, with annual production decreasing by 5,000 units during each of the next four years (i.e., 55,000 units in year 2, 50,000 units in year 3, and so on for a total of 250,000 units). In trying to decide which depreciation method to use, Sunbelt Systems, Inc., requested a depreciation schedule for each of the three depreciation methods

(straight-line, units-of-production, and double-declining-balance).

Requirements 1. For each depreciation method, prepare a depreciation schedule showing asset cost, depreciation expense, accumulated depreciation, and asset book value for each year of the asset’s life. For the units-of-production method, round depreciation per unit to three decimal places.

2. Sunbelt Systems, Inc., prepares financial statements using the depreciation method that reports the highest income in the early years of asset use. For income tax purposes, the company uses the depreciation method that minimizes income taxes in the early years. Consider the first year Sunbelt Systems, Inc., uses the equipment.

Identify the depreciation methods that meet Sunbelt Systems’ objectives, assuming the income tax authorities permit the use of any method.

3. Show how Sunbelt Systems, Inc., would report equipment on the December 31, 2015, balance sheet for each depreciation method.

AppendixLO1