Decision-Making Across the Organization Pinson Company and Estes Company are two
ID: 2402767 • Letter: D
Question
Decision-Making Across the Organization Pinson Company and Estes Company are two proprietorships that are similar in many respects. One difference is that Pinson Company uses the straight-line method and Estes Company uses the declining-balance method at double the straight-line rate. On January 2 2015, both companies acquired the depreciable assets shown below Usetul Lite Asset Buildings Equipment oS $360,000 130,000 Salvage Value $20,000 10,000 40 years ars Including 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 2017 90,000 85,000 Total $262,400 229,000 2015 Pinson Company Estes Company $84,000 68,000 2016 $88,400 76,000 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 Instructions With the class divided into groups, answer the following. Determine the annual and total depreciation recorded by each company during the 3 years. Assuming that Estes Company also uses the straight-line method of depreciation instead of the declining-balance method as in (a), prepare comparative income data for the 3 years Which company should Lynda Peace buy? Why?Explanation / Answer
Answers
----Building
A
Cost
$ 360,000.00
B
Residual Value
$ 20,000.00
C=A – B
Depreciable base
$ 340,000.00
D
Life [in years]
40
E=C/D
Annual SLM depreciation
$ 8,500.00
F=E/C
SLM Rate
2.50%
G=F x 2
DDB Rate
5.00%
---Double Declining depreciation for Building
Year
Beginning Book Value
Depreciation rate
Depreciation expense
Ending Book Value
Accumulated Depreciation
2015
$ 360,000
5.00%
$ 18,000
$ 342,000
$ 18,000
2016
$ 342,000
5.00%
$ 17,100
$ 324,900
$ 35,100
2017
$ 324,900
5.00%
$ 16,245
$ 308,655
$ 51,345
---Equipment
A
Cost
$ 130,000.00
B
Residual Value
$ 10,000.00
C=A – B
Depreciable base
$ 120,000.00
D
Life [in years]
10
E=C/D
Annual SLM depreciation
$ 12,000.00
F=E/C
SLM Rate
10.00%
G=F x 2
DDB Rate
20.00%
---Double declining depreciation for Equipment
Year
Beginning Book Value
Depreciation rate
Depreciation expense
Ending Book Value
Accumulated Depreciation
1
$ 130,000
20.00%
$ 26,000
$ 104,000
$ 26,000
2
$ 104,000
20.00%
$ 20,800
$ 83,200
$ 46,800
3
$ 83,200
20.00%
$ 16,640
$ 66,560
$ 63,440
Pinson Company
Estes Company
Building Depreciation expense
Equipment depreciation expense
Total Depreciation expense
Building Depreciation expense
Equipment depreciation expense
Total Depreciation expense
2015
$ 8,500
$ 12,000
$ 20,500
$ 18,000
$ 26,000
$ 44,000
2016
$ 8,500
$ 12,000
$ 20,500
$ 17,100
$ 20,800
$ 37,900
2017
$ 8,500
$ 12,000
$ 20,500
$ 16,245
$ 16,640
$ 32,885
Total
$ 25,500
$ 36,000
$ 61,500
$ 51,345
$ 63,440
$ 114,785
Annual & Total Depreciation
Pinson Company
Estes Company
2015
$ 20,500
$ 44,000
2016
$ 20,500
$ 37,900
2017
$ 20,500
$ 32,885
---Working for converting Estes company’s Net Income as per Straight Line Method
Year
2015
2016
2017
Net Income after depreciation
$ 68,000
$ 76,000
$ 85,000
Add: DDB Depreciation expense
$ 44,000
$ 37,900
$ 32,885
Net Income before depreciation expense
$ 112,000
$ 113,900
$ 117,885
Less: Depreciation as per SLM
$ 20,500
$ 20,500
$ 20,500
Net Income to be considered
$ 91,500
$ 93,400
$ 97,385
----Comparative Income Statement
Year
Pinson Company Net Income
Estes Company Net Income
2015
$ 84,000
$ 91,500
2016
$ 88,400
$ 93,400
2017
$ 90,000
$ 97,385
Linda Peace should buy “ESTES COMPANY”.
This is because, even though Estes Company’s Net Income are LOWER than Pinson’s company, the Net Income after eliminating the effect of Double declining method depreciation and using Straight Line depreciation, the Net Income of Estes is MORE than that of Pinson Company.
A
Cost
$ 360,000.00
B
Residual Value
$ 20,000.00
C=A – B
Depreciable base
$ 340,000.00
D
Life [in years]
40
E=C/D
Annual SLM depreciation
$ 8,500.00
F=E/C
SLM Rate
2.50%
G=F x 2
DDB Rate
5.00%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.