Diamondback Mfg. is buying a new grinding machine. The machine costs $124,000 and is assumed to have a salvage value of $4,000 in five years. The manufacturer’s description of the machine indicates that it should operate for 30,000 hours. The company’s accountant is trying to decide whether to depreciate the machine by the straight-line method, the double-declining- balance method, or the units-of-production method. The machine will be purchased on January 1 of the coming year.

Required

A. Set up depreciation schedules for the straight-line and double-declining-balance methods.

B. Using the units-of-production method, calculate the hourly rate and yearly depreciation, assuming the machine is used evenly throughout its life. Comment on the reasonableness of this assumption.

C. Assume that after using the machine for three-and-a-half years, a new and improved machine is purchased. The old machine is then sold for $25,000. Calculate any gain or loss on the sale of the machine under each of the three depreciation methods. (Note: When calculating the gain or loss for the units-of-production method, assume that the machine was not used equally each year. Instead, assume the actual hours used each year were 6,000, 7,000, 8,000, and 4,000. Discuss any differences found in the gain or loss.)

D. With regard to the year of disposal of the machine, indicate what would appear on the income statement and the statement of cash flows for each method. Assume the indirect method is used for the statement of cash flows.