Question

Required information [The following information applies to the questions displayed below.) Three different companies each purchased trucks on January 1, 2018, for $70,000. Each truck was expected to last four years or 200,000 miles. Salvage value was estimated to be $5,000. All three trucks were driven 66,000 miles in 2018, 41,000 miles in 2019, 39,000 miles in 2020, and 61,000 miles in 2021. Each of the three companies earned $59,000 of cash revenue during each of the four years. Company A uses straight- line depreciation, company B uses double-declining-balance depreciation, and company C uses units-of- production depreciation. Answer each of the following questions. Ignore the effects of income taxes. Required a-1. Calculate the net income for 2018? (Round "Per Unit Cost" to 3 decimal places.) Net Income Company Company Company a-2. Which company will report the highest amount of net income for 2018? Company A Company B Company C All of the choices

Answer 1

		Company A	Company B	Company C
		Straight line method	Double declining bal. depr.	Units of production
	Cost	$70,000	$70,000	$70,000
	Life	4 years	4 years	200,000 miles
	Salvage value	$5,000	$5,000	$5,000
	Depreciation rate	25%	50%	0.325 per miles
	Formula	((Cost-salvage value)/useful life)/(cost-salvage value)	1/useful life*2*100	(Cost-salvage value)/estimated life in miles
		((70,000-5000)/4)/(70000-5000)	1/4*2*100	(70,000-5,000)/200,000
	Revenue	$59,000	$59,000	$59,000
	Less : Depreciation 31 Dec 2018	$16,250	$35,000	$21,450
		(65,000*25%)	(70,000*50%)	(66,000*0.325)
	Net Income	$42,750	$24,000	$37,550
	Book value of asset	$53,750	$35,000	$48,550
		(70,000-16,250)	(70,000-35,000)	(70,000-21,450)
	Depreciation 31 Dec. 2019	$16,250	$17,500	$13,325
	Depreciation 31 Dec. 2020	$16,250	$8,750	$12,675
	Depreciation 31 Dec. 2021	$16,250	$3,750	$17,550
a-1	Company A	$42,750
	Company B	$24,000
	Company C	$37,550
a-2	Company A will report highest amount of Net Income
c-1	Company A	$53,750
	Company B	$35,000
	Company C	$48,550
c-2	Highest book value will be reported by Company A
d-1	Company A	$171,000	(59000*4-65000)
	Company B	$171,000	(59000*4-65000)
	Company C	$171,000	(59000*4-65000)
d-2	All company have the same retained earnings
e	The cash flow from operating activities will be	Lowest	For	Company B	If income tax is not considered
	Depreciation expense	is NOT	a cashflow item

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