Problem NO: 1

Alladin Company purchased Machine #201 on May 1, 2014. The following information relating to Machine #201 was gathered at the end of May.\nPrice $85,00

Alladin Company purchased Machine #201 on May 1, 2014. The following information relating to Machine #201 was gathered at the end of May.

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Price $85,000

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Credit terms 2/10, n/30

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Freight-in $ 800

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Preparation and installation costs $ 3,800

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Labor costs during regular production operations $10,500

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It is expected that the machine could be used for 10 years, after which the salvage value would be zero.

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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, 2014. Alladin uses the calendar year as the basis for the preparation of financial statements.

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Instructions

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(a) Compute the depreciation expense for the years indicated using the following methods. (Round to thenearest dollar.)

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(1) Straight-line method for 2014.

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(2) Sum-of-the-years’-digits method for 2015.

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(3) Double-declining-balance method for 2014.

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(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 allocate less of the company’s depreciation expense to the early years and more to later years of the assets’ lives. What method would you recommend?

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