Swanson & Hiller, Inc., purchased a new machine on September 1, 2008 at a cost of $108,000. The machine’s estimated useful life at the time of the purchase was five years, and its residual value was $8,000.

Instructions

a. Prepare a complete depreciation schedule, beginning with calendar year 2008; under each of the methods listed below (assume that the half-year convention is used):

1. Straight-line.

2. 200 percent declining-balance.

3. 150 percent declining-balance, switching to straight-line when that maximizes the expense.

b. Which of the three methods computed in part a is most common for financial reporting purposes? Explain.

c. Assume that Swanson & Hiller sells the machine on December 31, 2011, for $28,000 cash.

Compute the resulting gain or loss from this sale under each of the depreciation methods used in part a. Does the gain or loss reported in the company’s income statement have any direct cash effects? Explain.