Question
Suarez Inc. Part A: Suarez Inc. purchased machinery on January 1, 2020, at a cost of $500,000. The estimated useful life of the machinery is
Suarez Inc. Part A: Suarez Inc. purchased machinery on January 1, 2020, at a cost of $500,000. The estimated useful life of the machinery is 4 years with an estimated value at the end of the period of $50,000. During its life, the machine is expected to produce 20,000 units. The company is considering different depreciation methods that could be used for financial reporting methods. The company forecasts that 6,000 units will be manufactured in 2020, 5,000 units in 2021, 4,000 units in 2022, and 5,000 units in 2023. Requirements (a) Prepare separate depreciation schedules for the machinery using straight-line method, double declining balance method, and the productive output method. Use the following format for each method: Straight Line Year Depreciation Expense Accumulated Depreciation BookValue At Acquisition 12/31/20 12/31/21 12/31/22 12/31/23 Double Declining balance method Year Depreciation Expense Accumulated Depreciation BookValue At Acquisition 12/31/20 12/31/21 12/31/22 12/31/23 Productive output method Year Depreciation Expense Accumulated Depreciation BookValue At Acquisition 12/31/20 12/31/21 12/31/22 12/31/23 (b) Which method results in the highest reported 2020 income? In the highest reported net income over the 4-year period. (c) Which method results in the highest asset value in 2020. (d) As the CFO of Suarez Inc. which method would you recommend that the company adopt and why? Part B: Selected disclosure on depreciation policies related to machinery and equipment are provided for three new companies in the same industry: Requirements As a financial analyst tracking the three companies, comment on how the depreciation policies of the three companies will affect your analysis. Use the following table to summarize how much net income, asset value, and CFO each company will report relative to the other as a result of their depreciation policies and then discuss briefly. Use notations such as highest, middle, lowest to summarize the amounts reported by each company relative to the other. Net Income Asset Value Cash Flow From Operations (CFO) Company X Company Y Company Z Company X: Machinery and equipment are depreciated using accelerated methods, which accumulate depreciation of approximately two-thirds of the depreciable cost during the first half of the estimated useful lives. A 14-year life is used to depreciate machinery and equipment. No residual value is assumed. Company Y: Machinery and equipment are depreciated using the straight-line method of depreciation over the estimated useful life of the asset. On average, a 14-year useful life is used to depreciate machinery and equipment. No residual value is assumed. Company Z: Depreciation is provided on a straight-line basis. Machinery and equipment are depreciated over a 17- year useful life and a residual value of 10% of the acquisition cost is assumed.
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