Broadening Your Perspective 10-5 ompany uses the dedlining-balance that are simi
ID: 2399405 • Letter: B
Question
Broadening Your Perspective 10-5 ompany uses the dedlining-balance that are similar in many respects. One difference is that Pinson Company uses the straight-line method and Estes C Pinson Company and Estes Company are two proprietorships method at double the straight-line rate. On January 2, 2015, both companies acquired the depreciable assets shown below Salvage Value Asset Cost Useful Life Buildings $310,000 $30,000 Equipment 104,000 40 years 10 years 4,000 Induding the appropriate depreciation charges, annual net income for the companies in the years 2015, 2016, and 2017 and total income for the 3 years were as follows 2015 2016 2017 Total Pinson Company $82,500 $86,900 $88,500 $257,900 Estes Company 0,000 78,000 87,000 235,000 At December 31, 2017, the balance sheets of the two companies are similar except that Estes Company has more cash than Pinson Company. Lynda Peace is interested in buying one of the companies. She comes to you for advice Answer the following Determine the annual depreciation recorded by each company during the 3 years.(Round answers to O decimal places, e.g. 2,125.) Pinson Company Estes Company 2015 2016 2017Explanation / Answer
Answers
Working
Building
Equipment
A
Cost
$ 310,000.00
$ 104,000.00
B
Salvage Value
$ 30,000.00
$ 4,000.00
C=A - B
Depreciable base
$ 280,000.00
$ 100,000.00
D
Useful life [in years]
40
10
E=C/D
Annual SLM depreciation [to be used by Pinson Company*]
$ 7,000.00
$ 10,000.00
F = E/C
SLM Rate
2.50%
10.00%
G = F x 2
DDB rate [to be used by Estes Company*]
5.00%
20.00%
---Double declining balance method depreciation expense for Estes Company
Building:
Year
Beginning Book Value
Depreciation rate
Depreciation expense
Ending Book Value
Accumulated Depreciation
2015
$ 310,000
5.00%
$ 15,500
$ 294,500
$ 15,500
2016
$ 294,500
5.00%
$ 14,725
$ 279,775
$ 30,225
2017
$ 279,775
5.00%
$ 13,989
$ 265,786
$ 44,214
Equipment:
Year
Beginning Book Value
Depreciation rate
Depreciation expense
Ending Book Value
Accumulated Depreciation
1
$ 104,000
20.00%
$ 20,800
$ 83,200
$ 20,800
2
$ 83,200
20.00%
$ 16,640
$ 66,560
$ 37,440
3
$ 66,560
20.00%
$ 13,312
$ 53,248
$ 50,752
Pinson Company
Estes Company
Building Depreciation expense
Equipment depreciation expense
Total Depreciation expense
Building Depreciation expense
Equipment depreciation expense
Total Depreciation expense
2015
$ 7,000
$ 10,000
$ 17,000
$ 15,500
$ 20,800
$ 36,300
2016
$ 7,000
$ 10,000
$ 17,000
$ 14,725
$ 16,640
$ 31,365
2017
$ 7,000
$ 10,000
$ 17,000
$ 13,989
$ 13,312
$ 27,301
Total
$ 21,000
$ 30,000
$ 51,000
$ 44,214
$ 50,752
$ 94,966
Depreciation expense for each year for 3 years:
Pinson Company
Estes Company
2015
$ 17,000
$ 36,300
2016
$ 17,000
$ 31,365
2017
$ 17,000
$ 27,301
---See Working #2 Total column
Total Accumulated Depreciation
Pinson Company
$ 51,000
Estes Company
$ 94,966
Calculation of Net Income if Estes has used Straight Line Method depreciation method:
Year
2015
2016
2017
Net Income after depreciation given
$ 70,000
$ 78,000
$ 87,000
Add: DDB Depreciation expense [calculated in #2 working]
$ 36,300
$ 31,365
$ 27,301
Net Income before depreciation expense
$ 106,300
$ 109,365
$ 114,301
Less: Depreciation as per SLM
$ 17,000
$ 17,000
$ 17,000
Net Income to be considered
$ 89,300
$ 92,365
$ 97,301
Year
Pinson Company Net Income [given]
Estes Company Net Income [calculated in Working #3]
2015
$ 82,500
$ 89,300
2016
$ 86,900
$ 92,365
2017
$ 88,500
$ 97,301
Lynda should buy Estes Company because Net Income of Estes are lower than Pinson only because of different methods of depreciation. If Estes had used Straight Line method same as Pinson company, its Net Income would have been higher than Pinson [as calculated in Answer 3 above].
Working
Building
Equipment
A
Cost
$ 310,000.00
$ 104,000.00
B
Salvage Value
$ 30,000.00
$ 4,000.00
C=A - B
Depreciable base
$ 280,000.00
$ 100,000.00
D
Useful life [in years]
40
10
E=C/D
Annual SLM depreciation [to be used by Pinson Company*]
$ 7,000.00
$ 10,000.00
F = E/C
SLM Rate
2.50%
10.00%
G = F x 2
DDB rate [to be used by Estes Company*]
5.00%
20.00%
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