Question

Three different companies each purchased trucks on January 1, Year 1, for $72,000. Each truck was expected to last four years or 200,000 miles. Salvage value was estimated to be $7,000. All three trucks were driven 67,000 miles in Year 1, 42,000 miles in Year 2, 40,000 miles in Year 3, and 62,000 miles in Year 4. Each of the three companies earned $61,000 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 Year 1. a-2. Which company will report the highest amount of net income for Year 1? b-1. Calculate the net income for Year 4. b-2. Which company will report the lowest amount of net income for Year 4? c-1. Calculate the book value on the December 31, Year 3, balance sheet. c-2. Which company will report the highest book value on the December 31, Year 3, balance sheet? d-1. Calculate the retained earnings on the December 31, Year 4, balance sheet. d-2. Which company will report the highest amount of retained earnings on the December 31, Year 4, balance sheet? e. Which company will report the lowest amount of cash flow from operating activities on the Year 3 statement of cash flows?

Answer 1

Requirement 1-a Year -1 Revenue Less: Depreciation Company 1 Company 2 Company 3 61000 61000 61000 16250 36000 21775 Net Income 44750 25000 39225 a-2 Company 1 has reproted Higher Net Income 44750 Ranking I 25000 III 39225 II b-1 Year -4 Company 1 Company 2 Company 3 Revenue 61000 61000 61000 Less: Depreciation 16250 4500 20150 Net Income 44750 56500 40850 Salvage Value 7000 7000 7000 Loss / Gain on Sale of Assets 2500 3575 Net Income (b) 44750 59000 44425 Here, At year 4, we have derecognised the Asset, as stated , the salvage value is 7000 receivable, hence same is deducted from the Carrying value as on Year 4 end ( to derive Gain / Loss). Such Gain or Loss is pass on through Income Sattement.

b-2 Company 3 has reported Lowest Income Year -4 Company 1 Company 2 Company 3 Net Income (b) 44750 59000 44425 Ranking II 1 III C-1 Carrying Value = Book Value as on Year 3 Balance Sheet Date. Refer the working note of Depreciation Schedule for All three company separately. Year 3 Company 1 Company 2 Company 3 Book Value 23250 9000 23575 C-2 Company 3 Has reported Highest Book Value Year 3 Company 1 Company 2 Company 3 Book Value 23250 9000 23575 Ranking II III 1 d-1 Retained Earning (RE) on Year 4 Balance Sheet Decemebre End. Retained Earning is the earning available after provisiong for tax for Equity Holders. Year -4 Company 1 Company 2 Company 3 Revenue 61000 61000 61000 Less: Depreciation 16250 4500 20150 Net Income 44750 56500 40850 Salvage Value 7000 7000 7000 Loss / Gain on Sale of Assets 2500 3575 Net Income (b)-RE 44750 59000 44425 Less: Tax Provision NIL NIL NIL

d-2 Company 2 has reported Highest Retained Earnings. Year -4 Company 1 Company 2 Company 3 Net Income (b) 44750 59000 44425 Ranking 1 III II e. Cash Flow is similar for all entity Cash Flow from Operating Actiivty - Year 3 Company 1 Company 2 Company 3 Net Earnings 44750 52000 48000 Add: Non Cash Expenses 16250 9000 13000 Earnings 61000 61000 61000 AS stated revenue genration is similar for all entitiy in all years ( 1-4)

Working Notes for Depreciation Schedule: Company 1 Company 2 Purchase of Truck 72000 72000 Salvage Value 7000 7000 Life 4 Years 4 Years Method of SLM Double Declining Depreciation Revenue (1-4 Years)61000 61000 Company 3 72000 7000 4 Years Units of Production 61000 Deprecitaion Schedule - Company 1 (SLM) Depreciation Cost Expenses Year 1 72000 16250 Year 2 55750 16250 Year 3 39500 16250 Year 4 23250 16250 Carrying Value 55750 39500 23250 7000 W/N-SLM = 72000-7000/4=16250 Deprecitaion Schedule - Company 2 ( Double Decelining) SLM Rate = 1/4 = 25% Depreciation Cost Expenses Carrying Value Year 1 72000 36000 36000 Year 2 36000 18000 18000 Year 3 18000 9000 9000 Year 4 9000 4500 4500

Deprecitaion Schedule - Company 3 ( Production Unit) Production Rate=( 72000 - 7000 / 200000) = 0.325 Depreciation Cost Expenses Carrying Value Year 1 72000 21775 50225 Year 2 50225 13650 36575 Year 3 36575 13000 23575 Year 4 23575 20150 3425 We have used production Rate X production Units in a particular year to derive the depreciation value in all Years 1 - 4.