Reference no: EM133051398
Question - HappyDay is planning to invest $20 million and acquire a new production line at the beginning of Year 3. Also, the company has intents to change the depreciation policy in order to manage the costs of production and income tax expenses better. Your new boss asks you to calculate depreciation expenses using straight-line, double-declining balance and units-of-production methods to determine which of the methods is better.
The new asset is expected to have a 10-year useful life. The total production is estimated at 500,000 tons. With respect to the new asset, HappyDay is expecting to generate the following results in Years 3-5.
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Year 3
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Year 4
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Year 5
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Expected amount of production, tons
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45,000
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65,000
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60,000
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Net Sales, thousand $
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85,000
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120,000
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110,000
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Expenses (before depreciation and income tax), thousand $
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45,000
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80,000
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73,000
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Income tax rate, %
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30
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30
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30
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Required - Answer the following questions
1. Determine the amount of depreciation expense in each year (Years 3-5) and accumulated depreciation HappyDay would report in the Year 5 financial statements. Use straight-line, double-declining balance, and units-of-production methods.
2. Compute HappyDay's Total Expenses, Income Tax, and Net Income in Years 3-5. Prepare the calculations using the depreciation amounts computed according to straight-line, double-declining balance, and units-of-production methods.
3. In your opinion, which of the depreciation methods should be used by HappyDay? Explain why.