Glans Company purchased equipment on account on April 6, 2012, at an invoice price of $442,000. On April 7, 2012, it paid $4,000 for delivery of the equipment. A one-year, $3,000 insurance policy on the equipment was purchased on April 9, 2012. On April 22, 2012, Glans paid $6,000 for installation and testing of the equipment. The equipment was ready for use on May 1, 2012.
Glans estimates that the equipment's useful life will be four years, with a residual value of $20,000. It also estimates that, in terms of activity, the equipment's useful life will be 150,000 units. Glans has an April 30 fiscal year end. Assume that actual usage is as follows:
# of Units ____________________________ Year Ended April 30
22,600 .................................................. 2013
45,600 .................................................. 2014
49,700 .................................................. 2015
32,200 .................................................. 2016
Instructions
(a) Determine the cost of the equipment.
(b) Prepare depreciation schedules for the life of the asset under the following depreciation methods:
1. Straight-line
2. Diminishing-balance at double the straight-line rate
3. Units-of-production
(c) Which method would result in the highest profit for the year ended April 30, 2013? Over the life of the asset?
(d) Which method would result in the least cash used for the year ended April 30, 2013? Over the life of the asset?
TAKING IT FURTHER
Assume instead that at the time Glans purchased the equipment, it had a legal obligation to ensure that the equipment was recycled at the end of its useful life. Assume the cost of doing this is significant. Would this have had an impact on the answers to (a) and (b) above? Explain.