Reference no: EM133153827
Question - Alladin Company purchased Machine #201 on May 1, 2020. The following information relating to Machine #201 was gathered at the end of May.
Price 85,000
Credit Terms 2/10, n/30
Freight-in 800 Preparation and Instillation Costs 3,800
Labor Costs during regular production operations 10,500
It is expected that the machine could be used for 10 years, after which the salvage value would be zero. Alladin intends to use the machine for only 8 years, however, after which it expects to be able to sell it for $1,500. The invoice for Machine #201 was paid May 5, 2020. Alladin uses the calendar year as the basis for the preparation of financial statements.
Required -
a) Compute the depreciation expense for the years indicated using the following methods.
1. Straight-line method for 2020.
2. Double-declining-balance method for 2020
b) Suppose Kate Crow, the president of Alladin, tells you that because the company is a new organization, she expects it will be several years before production and sales reach optimum levels. She asks you to recommend a depreciation method that will give more flexibility to the firm since it has outstanding debt covenants that are tied to the net income for the year. What method would you recommend explain?
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