QUESTION 1 Congratulations! High Hopes Incorporated, a new start-up company, has
ID: 2418756 • Letter: Q
Question
QUESTION 1 Congratulations! High Hopes Incorporated, a new start-up company, has just hired you as their new business consultant. High Hopes’ management is faced with making some quick decisions as to which accounting methods they should use. They have provided you with the following projected financial information for 2015: On 1/1/15 Acquire equipment for $40,000 cash. The equipment has a 5-year life and a $5,000 salvage value. During 2015 Purchase inventory: Date Number of Units Unit Price 1/1 100 $115 7/1 150 $110 11/1 110 $100 Total 360 Sell 200 units of inventory at $400 each. Other expenses for the year, excluding depreciation, total $10,000. They are considering two alternatives for these items: 1. Double-declining balance depreciation and the FIFO periodic inventory method, OR 2. Straight-line depreciation and the LIFO periodic inventory method. It’s your first day on the job. They have asked you to indicate the impact of these alternative accounting method choices on their income statement. Quickly, you dash back to your office and compute the income statement for the first year of operation under each alternative. In your haste, you spill coffee on all of your work papers and you can read only the following: Alternative 1 2 Sales $ 80,000 $ 80,000 Cost of goods sold Gross margin Depreciation expense Other operating expenses 10,000 10,000 Net income Recalculate the missing information on the alternative income statements and enter the information in the table above. Enter digits only( no commas or $)
Explanation / Answer
Step 1: Calculate Depreciation and Cost of Goods Sold under Alternative 1
We need to calculate the depreciation under double declining method. The depreciation rate has been calculated below:
Annual Depreciation as Per Straight Line Method = (Cost - Salvage Value)/Estimated Life = (40,000 - 5,000)/5 = $7,000
Depreciation Rate as Per Straight Line Method = Annual Depreciation as Per Straight Line Method/ (Cost - Salvage Value) = 7,000/(40,000 - 5,000) = 20%
Depreciation Rate as Per Double Declining Method = Depreciation Rate as Per Straight Line Method*2 = 20%*2 = 40%
Depreciation for the Year 2015 = Cost*Depreciation Rate as Per Double Declining Method = 40,000*40% = $16,000
________
Cost of goods sold as Per FIFO method has been calculated as follows:
Cost of Goods Sold = 100*115 (from 1/1) + 100*110 (from 7/1) = $22,500 [units procured first are sold first]
________
Step 2: Calculate Depreciation and Cost of Goods Sold under Alternative 2
Annual Depreciation as Per Straight Line Method = (Cost - Salvage Value)/Estimated Life = (40,000 - 5,000)/5 = $7,000
________
Cost of goods sold as Per LIFO method has been calculated as follows:
Cost of Goods Sold = 90*110 (from 7/1) + 110*100 (from 11/1) = $20,900 [units procured last are sold first]
________
Step 3: Calculate Income Under Both Alternatives
The net income along with missing figures under both alternatives has been calculated as below:
Alternative 1 Alternative 2 Sales 80,000 80,000 Less Cost of Goods 22,500 20,900 Gross Margin 57,500 59,100 Less Operating Expenses 10,000 10,000 Depreciation Expense 16,000 7,000 Net Income $31,500 $42,100Related Questions
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