On January 1, 2012, Dayan Corporation, a small manufacturer of machine tools, acquired new industrial equipment for $1.1 million. The new equipment had a useful life of five years and the residual value was estimated to be $50,000. Dayan estimates that the new equipment can produce 12,000 machine tools in its first year. It estimates that production will decline by 1,000 units per year over the equipment's remaining useful life. The following depreciation methods may be used:
(1) Straight-line
(2) Double-declining-balance
(3) Units-of production.
For tax purposes, the CCA class is Class 10-30%.
Instructions
(a) Which of the three depreciation methods would maximize net income for financial statement reporting purposes for the three-year period ending December 31, 2014? Prepare a schedule showing the amount of accumulated depreciation at December 31, 2014, under the method you chose.
*(b) Over the same three-year period, how much capital cost allowance would have been written off for tax purposes?
(c) Which pattern of depreciation do you feel best reflects the benefits that are provided by the new equipment? Explain briefly.