Hi all,

Having a problem with a supposedly easy question but can't put my finger to Question C, therefore stuck at D. If someone could assist, that'd be greatly appreciated. I know the solution should be relatively simple, but can't pinpoint it at this stage.

Thanks in advance!

Cost of Machine $120,000
Estimated residual value $ 20,000
Estimated useful life 4 years
Profit before depreciation $250,000 for each year



REQUIRED:

Using the above information, calculate the:

A. annual depreciation rate for each of the four years using the straight-line method of depreciation (show all workings).
($120,000 - $20,000) / 4= $ 25,000

B. annual depreciation rate for each of the four years using the reducing balance method of depreciation, assume a depreciation rate of 36% (show all workings).


End of year

0 120,0000

1 76673.20

2 48989.80

3 31301.70

4. 20,000

C. net profit for each year under each depreciation method (show all workings).

D. discuss the effect of the straight-line method and the reducing balance method of depreciation on profit across these four years.

(C) wants you to figure the net profit for each year, which is just the pre-depreciation profit (250K each year), less the depreciation expense you calculated in (A) and in (B). Two separate answers; i.e. four "net profit" amounts (Years 1 - 4) using the straight-line depreciation method of (A), and four net profit amounts using the declining depreciation method of (B).

You are given
Profit before depreciation $250,000 for each year
Therefore you calculate the depreciation charge under each method and apply it to your Net Profit calculation

When you have done this the answer to D should be apparent