Question

Required information [The following information applies to the questions displayed below.] Three different companies each purchased trucks on January 1, Year 1, for $62,000. Each truck was expected to last four Years or 250,000 miles. Salvage value was estimated to be $2,000. All three trucks were driven 75,000 miles in Year 1, 60,000 miles in Year 2, 50,000 miles in Year 3, and 70,000 miles in Year 4. Each of the three companies earned $51,000 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. 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? Complete this question by entering your answers in the tabs below. Required D1 Required D2 Calculate the retained earnings on the December 31, Year 4, balance sheet. Retained Earnings Company A Company B Company C < Required D1 Required D2 >

Answer 1

Req d1	Retained Earnings
Company A	144,000
Company B	145,875
Company C	144,000
Req d2
Highest Retained Earnings	Company B

Year 1	Income Statement	Company A	Company B	Company C
	Revenue	51,000	51,000	51,000
	Depreciation expense	15,000	31,000	18,000
	Net Income	36,000	20,000	33,000
	Balance Sheet -Retained Earnings
	Opening Balance	-	-	-
	+ Net Income	36,000	20,000	33,000
	Closing Balance	36,000	20,000	33,000
Year 2	Income Statement	Company A	Company B	Company C
	Revenue	51,000	51,000	51,000
	Depreciation expense	15,000	15,500	14,400
	Net Income	36,000	35,500	36,600
	Balance Sheet -Retained Earnings
	Opening Balance	36,000	20,000	33,000
	+ Net Income	36,000	35,500	36,600
	Closing Balance	72,000	55,500	69,600
Year 3	Income Statement	Company A	Company B	Company C
	Revenue	51,000	51,000	51,000
	Depreciation expense	15,000	7,750	12,000
	Net Income	36,000	43,250	39,000
	Balance Sheet -Retained Earnings
	Opening Balance	72,000	55,500	69,600
	+ Net Income	36,000	43,250	39,000
	Closing Balance	108,000	98,750	108,600
Year 4	Income Statement	Company A	Company B	Company C
	Revenue	51,000	51,000	51,000
	Depreciation expense	15,000	3,875	15,600
	Net Income	36,000	47,125	35,400
	Balance Sheet -Retained Earnings
	Opening Balance	108,000	98,750	108,600
	+ Net Income	36,000	47,125	35,400
	Closing Balance	144,000	145,875	144,000

Company A
Straight line method
Annual depreciation	(Cost-Residual Value)/Useful Life
	=(62,000-2,000)/4
	15,000
						Calculation
Years of Useful life	Cost	Depreciation expense	Accumulated Depreciation	Year-end book value
Year 1	62,000	15,000	15,000	47,000
Year 2	62,000	15,000	30,000	32,000
Year 3	62,000	15,000	45,000	17,000
Year 4	62,000	15,000	60,000	2,000
Company B
Double declining balance method
Double declining rate	100%/Useful Life*2
	=100%/4*2
	50%
Years of Useful life	Beg book value	Depreciation expense	Accumulated Depreciation	Year-end book value		Depreciation expense
Year 1	62,000	31,000	31,000	31,000		=62,000*50%
Year 2	31,000	15,500	46,500	15,500		=31,000*50%
Year 3	15,500	7,750	54,250	7,750		=15,500*50%
Year 4	7,750	3,875	58,125	3,875		=7,750*50%
Company C
Units of production method
Depreciation per unit of production	(Cost-Residual Value)/Units of Production
	=(62,000-2,000)/250,000
	0.24
Years of Useful life	Cost	Depreciation expense	Accumulated Depreciation	Year-end book value		Depreciation expense
Year 1	62,000	18,000	18,000	44,000		=75,000*0.24
Year 2	62,000	14,400	32,400	29,600		=60,000*0.24
Year 3	62,000	12,000	44,400	17,600		=50,000*0.24
Year 4	62,000	15,600	60,000	2,000		=65,000*0.24
Note
In Year 4, depreciation expense is limited to 15,600 as year end book value cannot exceed salvage value of 2,000