Valmont Limited purchased equipment on March 27, 2015, at a cost of $122,000. Management is contemplating the merits of using the diminishing-balance or units-of-production method of depreciation instead of the straight-line method, which it currently uses for other equipment. The new equipment has an estimated residual value of $2,000 and an estimated useful life of either four years or 40,000 units. Demand for the products produced by the equipment is sporadic so the equipment will be used more in some years than in others. Assume the equipment produces the following number of units each year: 7,400 units in 2015; 10,200 units in 2016; 9,900 units in 2017; 10,000 units in 2018; and 2,500 units in 2019. Valmont has a December 31 year end.

Instructions

(a) Prepare separate depreciation schedules for the life of the equipment using

(1) The straight-line method,

(2) The double-diminishing-balance method,

(3) The units-of-production method.

(b) Compare the total depreciation expense and accumulated depreciation under each of the three methods over the life of the equipment.

(c) How does each method of depreciation affect the company's cash flows?

(d) Which method do you recommend? Why?