Walnut Ridge Production Inc. purchased a new computerized video editing machine at a cost of $450,000. The system has a residual value of $64,000 and an expected life of 5 years.
1. Compute depreciation expense, accumulated depreciation, and book value for the first 3 years of the machine’s life using the (a) straight-line method and (b) double-declining balance method.
2. Which method would produce the largest income in the first, second, and third years of the asset’s life?
3. Why might the controller of Walnut Ridge Production be interested in the effect of choosing a depreciation method? Evaluate the legitimacy of these interests.