Question: Alladin Company purchased a large piece of
Alladin Company purchased a large piece of equipment on October 1, 2020. The following information relating to the equipment was gathered at the end of October:
It is expected that the equipment could be used for 12 years, after which the salvage value would be zero.
Alladin intends to use the equipment for only 10 years, however, after which it expects to be able to sell
it for $3,100. The equipment was delivered on October 1 and the invoice for the equipment was paid on
October 9, 2020. Alladin uses the calendar year to prepare financial statements. Alladin follows IFRS for
financial statement purposes.
Instructions
a. Calculate the depreciation expense for the years indicated using the following methods. (Do not round intermediate calculations but round final amounts to the nearest dollar.)
1. Straight-line method for 2020
2. Sum-of-the-years'-digits method for 2021
3. Double-declining-balance method for 2020
b. The CEO of Alladin tells you that the company wants a stable level of income, because it plans to expand in the future and does not want to appear overly risky to potential lenders. He asks you, the company's newly hired CPA, to recommend a depreciation method that will best achieve this goal. You know that, because the equipment is new, it should have low repair and maintenance costs for the next few years. However, the repair and maintenance costs are likely to increase steadily during years 3 to 10 of the life of the equipment. Which method would you recommend? Explain.
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