Reference no: EM133233699

EnergyCo purchased some equipment to support its gas exploration mine on 2 January 2015. The equipment cost $112,000 to purchase. It was transported for the sum of $3,500 (including insurance costs) and installation cost was $4,500.

EnergyCo estimates that the equipment will remain in service for 5 years and perform 10,000 hours of service over the five year-period. At the end of its useful life EnergyCo estimates that the mobile equipment will have a residual value of $20,000. The equipment was used for 2,000 hours in the first year, 2,500 hours in the second year, 3, 000 in the third year and 1,200 hours in the fourth year and the rest in the fifth year. 

Assume a 31 December, end of financial year.

Required:

1. Prepare a schedule of depreciation expense per year for the equipment under the three depreciation methods (straight-line, reducing balance (based on formula and estimate) and units of use). Note: Four depreciation schedules must be prepared.
2. Which method will you recommend and why? (Note: Mention the method and explain why the method is preferred in comparison to the other possible methods. Explain possible tax implication of the decision as well.)
3. The truck was sold for $50,000 at the end of the first quarter of the third year. Assuming a straight-line depreciation, how will you enter this in a journal?
4. Suppose that EnergyCo re-estimated the useful life of the equipment to be 3 additional years at the end of the fourth year, make a journal entry for the depreciation