(Preparing amortization schedules, LO 3) In July 2004 Savory Inc. (Savory) purchased new equipment for $100,000. Savory’s management estimates that the equipment’s useful life will be eight years and that its residual value will be $5,000.

Required:

a. Prepare an amortization schedule for each year of the new piece of equipment’s life using:

i. straight-line amortization ii. declining balance amortization (25%)

iii. unit-of-production method Your amortization schedule should show the amortization expense for each year and the net book value of the equipment and accumulated amortization at the end of each year. For the unit-of-production method, assume that 10% of the production was produced in each of 2004, 2005, 2010, and 2011, and 15%

in each of the remaining years.

b. Which method do you think Savory’s managers would prefer if they have a bonus based on the company’s net income? Explain.