On January 1, 2024, Locke Company, a small machine-tool manufacturer, a piece of new industrial equipment. Pertinent data follow: Cost of equipment $ 1,260,000 Useful life 5 years Estimated salvage value 60,000 Estimated machine tools to be produced in first year 12,000 Estimated production decline per year over the remaining life of the equipment 1,000 units Class life for tax purposes 7 years

The following depreciation methods may be used: 1. Straight-line 2. Double-declining balance 3. Sum-of-years'-digits 4. Units-of-output

MACRS tables 1 33.33 20.00 14.29 10.00 2 44.45 32.00 24.49 18.00 3 14.81 19.20 17.49 14.40 4 7.41 11.52 12.49 11.52 5 11.52 8.93 9.22 6 5.76 8.92 7.37 7 8.93 6.55 8 4.46 6.55

Instructions: (AICPA adapted)

a. Which depreciation method would maximize net income for financial statement reporting for the 3-year period ending December 31, 2026? Prepare a schedule showing the amount of accumulated depreciation at December 31, 2026, 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 36, 2026? Determine the amount of accumulated depreciation at December 31, 2026. Ignore present value considerations.

NOTE: Enter a formula with cell references into the yellow shaded input cells. When calculating depreciation, use one of Excel depreciation functions with cell references.

a. 1. Straight-line using the SLN function Year 2024 2025 2026

2. Double-declining balance using the DDB function Year 2024 2025 2026

3. Sum-of-years'-digits using the SYD function Year 2024 2025 2026

4. Units-of-output using formulas Unit depreciation per unit Year 2024 2025 2026 Depreciation Expense Accumulated Depreciation Depreciation Expense Accumulated Depreciation Depreciation Expense Accumulated Depreciation Depreciation Expense Accumulated Depreciation

b. General MACRS method: (Values taken from the MACRS rates schedule.) Year 2024 2025 2026

Optional straight-line method Year 2024 2025 2026 Depreciation Expense Accumulated Depreciation Depreciation Expense Accumulated Depreciation

Method to maximize net income for financial statement reporting for the 3-year period ending December 31, 2026