Reference no: EM133146031

Question - Small Valley Ltd. purchased machinery on January 2, 2015, at a total cost of $85,000. The machinery's estimated useful life is 8 years or 60,000 hours, and its residual value is $5,000. The tax rate for CCA is 30%. During 2015 and 2016, the machinery was used 7,000 and 7,500 hours, respectively.

a) Compute depreciation under straight-line, units-of-production, and declining-balance methods for 2015 and 2016.

b) If management's objective in 2015 is to maximize income which method would you prefer? If it was income smoothing which method would you prefer?

c) It was decided in 2015 that Small Valley would use the straight-line method of depreciation. In December 30, 2016 Small Valley sold the equipment for $55,000 cash. Establish entries relating to the equipment and disposal in 2016. (Hint: depreciation should be taken prior to recording the sale)

d) It was decided in 2015 that Small Valley would use the deminishing balance method of depreciation. In December 30, 2016 Small Valley sold the equipment for $55,000 cash. Establish ALL journal entries relating to the equipment and disposal in 2016.

e) Looking at your answers in part c) and d) explain why there was a difference in the gain or loss recorded from the sale of the equipment.