Colorado Climber, which manufactures stairway railings, purchased a $15,000 lathe on January 2, 2009. The lathe was estimated to have a salvage value of $1,000 at the end of its five-year useful life. The company’s owner is trying to decide on a depreciation method to use for this new asset.
Required:
(a) Compute depreciation expense on the new lathe for 2009 and 2010 assuming that Colorado Climber uses the:
(1) Straight-line method
(2) Double-declining-balance method
(b) Suppose that the company decides to apply the units-of-production depreciation method to the new lathe. The lathe will be used to produce approximately 3,500 units of product over its useful life. Compute the depreciation expense on the lathe for 2009 and 2010 if 550 and 670 units of product are made, respectively, in 2009 and 2010.
(c) Which of the three major depreciation methods best satisfies the matching principle? Defend your choice.
(d) Under which of the three depreciation methods will Colorado Climber have the highest net income for 2009? For 2010? Show your calculations.
(e) If Colorado Climber wants to minimize its tax liability, which depreciation method should the company use for 2009 and 2010? Explain your answer.
(f) Why do you think the government allows a company to use different depreciation methods for accounting and tax purposes? Do you think that using different methods for accounting and tax purposes is ethical? Explain your answer.