Campagner Company purchased equipment on account on September 3, 2012, at an invoice price of $210,000. On September 4, 2012, it paid $4,400 for delivery of the equipment. A one-year, $1,975 insurance policy on the equipment was purchased on September 6, 2012. On September 20, 2012, Campagner paid $5,600 for installation and testing of the equipment. The equipment was ready for use on October 1, 2012.

Campagner estimates that the equipment’s useful life will be four years, with a residual value of $13,000. It also estimates that, in terms of activity, the equipment’s useful life will be 75,000 units. Campagner has a September 30 fiscal year end. Assume that actual usage is as follows: 

# of Units …………. Year Ended September 30

15,750 …….…………………. 2013

23,900 …….…………………. 2014

20,200 ……………………….. 2015

15,350 ……………………….. 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 September 30, 2013? Over the life of the asset?

(d) Which method would result in the least cash used for the year ended September 30, 2013? Over the life of the asset? 

TAKING IT FURTHER 

Assume instead that, when Campagner 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 parts (a) and (b) above? Explain.