Fast Arrow Ltd. purchased a new bus on October 3, 2012, at a total cost of $130,000 each. Management is contemplating the merits of using the diminishing-balance or units-of-production methods of depreciation instead of the straight-line method, which it currently uses for other buses. The new bus has an estimated residual value of $10,000, and an estimated useful life of either three years or 300,000 km. Use of the bus will be sporadic so it could be much higher in some years than in other years. Assume the new bus is driven as follows: 15,000 km in 2012; 130,000 km in 2013; 65,000 km in 2014; and 90,000 km in 2015. Fast Arrow has an October 31 year end.

Instructions

(a) Prepare separate depreciation schedules for the life of the bus using the straight-line method, the double diminishing- balance method, and the units-of-production method.

(b) Compare the total depreciation expense and accumulated depreciation under each of the three methods over the life of the bus.

(c) How does each different method of depreciation affect the company's cash flows?

(d) Which method do you recommend? Why?