P 7

Comparison of Depreciation Methods P7.

Bao Wao Designs Inc. purchased a computerized blueprint printer that will assist in the design and display of plans for factory layouts. The cost of the printer was $22,500, and its expected useful life is four years. The company can probably sell the printer for $2,500 at the end of four years. The printer is expected to last 6,000 hours. It was used 1,200 hours in year 1; 1,800 hours in year 2; 2,400 hours in year 3; and 600 hours in year 4. Required

1. Compute the annual depreciation and carrying value for the new blueprint printer for each of the four years (round to the nearest dollar where necessary) under each of the following methods: (a) straight-line, (b) production, and (c) double-declining balance.

2. If the printer is sold for $12,000 after year 2, what would be the gain or loss under each method?

3. Accounting Connection What conclusions can you draw from the patterns of yearly depreciation and carrying value in requirement 1? Do the three methods differ in their impact on profitability? Do they differ in their effect on the companys operating cash flows? Explain.