McConnell Corporation purchased a new machine for its assembly process on 9/1/12. The cost of this machine was $200,000, plus 5% sales tax. The vendor allowed a 1% cash discount for paying within 10 days, which McConnell took. McConnell paid $600 freight charges for delivery of the machine. It cost $3,400 to construct a platform to house the machine, and the trial runs cost another $5,000. Finally, McConnell purchased filters and a special lubricating oil for the machine for $750. The company estimated that the machine would have a trade-in value of $13,000 at the end of its service life. Its life is estimated as 6 years, or 75,000 units of production. McConnell expects the machine to produce 15,000 units in its first year of use, and the company estimates that production will decline by 1,000 units each year of the remaining useful life of the machine.
(1) Compute depreciation expense and write the journal entry to record it under the following unrelated assumptions:
straight-line depreciation for 2012,
(b) units of output in 2012 (assuming that McConnell’s expected rate of usage is correct),
(c) sum of the years’ digits for 2013:
(d) double declining balance for 2013:
Which depreciation method would maximize net income for financial reporting for the three-year period ending 12/31/14? Prepare a schedule showing the amount of accumulated depreciation at 12/31/14 for the method selected.
Which depreciation method would minimize net income for income tax reporting for the 3-year period ending 12/31/14? Prepare a schedule showing the amount of accumulated depreciation at 12/31/14 for the method selected.
Assume that McConnell uses the straight-line depreciation method and that it sells the machine on 6/30/14 for $150,000. Make all journal entries necessary to record the disposal.