Two companies, A and B, start with $500 cash and $500 common stock. Each year, t

Question

Two companies, A and B, start with $500 cash and $500 common stock. Each year, the companies recocgnize total revenues of $800 and make cash expenditures, excluding equipment purshases, of $100. At the begging of opperation, each company pays $200 to buy equipment. A estimates that the equiment will have useful life of 2 years. B estimates a much shorter useful life and expenses the equipment immediately. The companies have no other assets and make no other equipment purshase during the 2 year period. Assume the companies ay no dividends, earn zero interset on cash balances, have a tax rate of 30%, and use the same accouting method for financial and tax purposes. Show the balance sheet and income statement for company B.

Explanation / Answer

INCOME STATEMENT FOR COMPANY B:

BALANCE SHEET FOR COMPANY B :

It is assumed that equipment purchase and tax expense are incurred in cash. Since equipment has a shorter life than 2 years and is of low value , cost is expensed to income statement. The company is correct in doing so.

Particulars Amount in $ Amount in $ A Revenue 800 B Expenses: Operating expenses 100 Other expenses (equipment purchase) 200 300 C Profit before tax ( A- B ) 500 D Tax expense (500 x 30%) 150 E Net income ( C- D) 350

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