Clemson Manufacturing Company produces specialty textiles. On January 1, it purchased a new weaving machine at a

Question:

Clemson Manufacturing Company produces specialty textiles. On January 1, it purchased a new weaving machine at a cost of $600,000. The machine has an expected life of five years and an estimated salvage value of $40,000. The company manager thinks the machine can be used to weave 4.0 million yards of fabric. The net income before depreciation and taxes in the first year was $3,600,000. The company’s tax rate is 30%.

Required

A. Prepare a five-year depreciation schedule for the machinery under both straight-line and double-declining-balance methods.

B. Determine the amount of depreciation expense the company would incur during the first year if the units-of-production method were used and 1.2 million yards of fabric were produced.

C. Which of the three methods would result in the lowest income tax expense for the first year?

D. Which of the three methods would result in the highest net income for the first year?

E. Assume the income tax must be paid immediately at year-end. Assume also you are the chief executive officer (CEO) of the corporation and are paid a significant bonus based on reported profit for the year. Which accounting method would you recommend be used regarding this new equipment? Why?

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... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...