Milton Baxter is the in-charge auditor for Apex Company, a long-time client of the Baxter CPA Group. The company has expanded into a new industry by acquiring equipment that will be used to manufacture several types of products. The CEO has indicated that as one of the conditions for providing financing for the new equipment, the bank must receive a copy of the annual financial statements. Another condition is that the total assets cannot fall below $300,000.The loan will be called for immediate repayment, if this happens.
Currently, the total assets are reported at $308,000 (including the new machine but prior to making the adjustment for depreciation).The CEO of Apex has asked Baxter to examine the facts and provide audited financial statements that are acceptable to the bank.
The depreciation method for the machinery has not been adopted yet. Equipment in other parts of the company uses the double-declining balance method. The cost of the new equipment is $60,000 and it is estimated to be worth $5,000 at the end of five years. Because the new products have not yet begun to catch on with consumers, the company produced just 5,000 units this year and it is expected that a total of 40,000 units will be made over the 5 year period.

Based on this information, calculate straight-line, double-declining balance, and unit of production depreciation for the new machine. Which depreciation method would allow Apex to stay within the bank’s threshold? Is it ethical to recommend that method to the company prior to audit?

  • CreatedJanuary 21, 2015
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