On January 1, 2016, Golden Company purchased a new computer system for $50,000.
ID: 2521773 • Letter: O
Question
On January 1, 2016, Golden Company purchased a new computer system for $50,000. Management estimates that the system will have a 5-year life and a salvage value of $7,500. Jane Golden, the company president, knows that the system can be depreciated using either the straight-line method or the double-declining method. She is concerned as to the possible effect on various financial statement analyses if the company uses one method versus the other.
Required: a) Determine which method will have the larger negative effect (in other words, the less favorable effect) on each of the following ratios in 2016:
Debt to equity ratio
Return on sales (net income/sales)
b) Determine which method will have the larger negative effect on each of the following ratios in 2018:
Debt to equity ratio
Return on sales
Explanation / Answer
a. Determine which method will have the larger negative effect (in other words, the less favorable effect) on each of the following ratios in 2016:
Debt to equity ratio
Return on sales (net income/sales)
(double-declining balance will have the larger negative effect)
b. Determine which method will have the larger negative effect on each of the following ratios in 2018:
Debt to equity ratio
Return on sales
(straight-line will have the larger negative effect)
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