Smith and Wilson Inc purchased a new machine on September 1 of the current year at a cost of 1 070 000 USD.

The machines estimated useful life at the time of the purchase was 10 years, and its residual value was 70 000 USD.

The company reports on a calendar year basis.

A.

Prepare a complete depreciation schedule, beginning with the current year, under each of the following methods listed (assume that the half-year convention is NOT used):

• A1 Straight line (10 points)
• A2 200 percent declining balance (10 points)
• A3 150 percent declining balance, (10 points).

Which of the three methods computed is most common for financial reporting purposes? (5 points)

Assume Smith and Wilson Inc sells the machine on December 31 of the fourth year, for 700 000 USD. Compute the resulting gain or loss from this sale under each of the depreciation methods used.

Does the gain or loss reported in the companys income statement have any direct impact on cash? (5 points)

B.

The company purchased the new machine with a loan for the full amount. Conditions of the loan were 10 years at 7% fixed interest.

Prepare the loans amortization table showing for each year, the yearly installment, interest expense, principal pay-back and outstanding balance. (30 points)

What would have been the impact from borrowing over half the time (5 years only) or at half the interest rate. (5 points)