Comparison of Depreciation Methods
P3. Ivan Manufacturing Company purchased a robot for $360,000 at the beginning of year 1. The robot has an estimated useful life of four years and an estimated residual value of $30,000. The robot, which should last 20,000 hours, was operated 6,000 hours in year 1; 8,000 hours in year 2; 4,000 hours in year 3; and 2,000 hours in year 4.
Required
1. Compute the annual depreciation and carrying value for the robot for each year assuming the following depreciation methods: (a) straight-line, (b) production, and (c) double-declining-balance.
2. If the robot is sold for $375,000 after year 2, what would be the amount of gain or loss under each method?
3. What conclusions can you draw from the patterns of yearly depreciation and carrying value in requirement 1? Do the three methods differ in their effect on the company’s profitability? Do they differ in their effect on the company’s operating cash flows? Explain.