On July 1, 2011, the consulting firm of Little, Smart, and Quick bought a new computer for

Question:

On July 1, 2011, the consulting firm of Little, Smart, and Quick bought a new computer for $120,000 to help it service its clients more efficiently. The new computer was estimated to have a useful life of five years with an estimated salvage value of $20,000 at the end of five years. It was further estimated that the computer would be in operation about 1,500 hours in each of the five years with some variation of use from year to year. Janet Little, who manages the firm’s internal operations, has asked you to help her decide which depreciation method should be selected for the new computer. The methods being considered are straight-line, double-declining-balance, and sum-of-the-years’-digits.

Required:

1. Prepare a schedule showing depreciation for 2011, 2012, and 2013 for each of the three methods being considered.

2. For each of the three methods, compute the asset book value that would be reported on the balance sheet at December 31, 2013.

3. Interpretive Question: Which method would maximize income for the three years (2011–2013), and which would minimize income for the same period?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...