Chapter 6, Problem 24P

a.

To determine

Identify the company which will report the highest amount of net income for 2014.

Explanation of Solution

Net Income

Net income is the sum total of all the revenues generated in a particular accounting period after deducting cost of goods sold and expenses and losses, such as rent expense, depreciation of that particular accounting period.

Identify the company which will report the highest amount of net income for 2014:

Net Income for 2014
	Company A (in $)	Company B (in $)	Company C (in $)
Revenue	30,000	30,000	30,000
Less: Depreciation expense	12,000	25,600	14,500
Net Income	$18,000	$4,400	$15,500

Table (1)

Working Note 1: Prepare depreciation schedule under straight-line method for Company A.

Date	Depreciable Cost (in $)	Depreciation Rate	Depreciation expense (in $)
	(A)	(B)	$\left(\left(\text{C}\right)=\left(\text{A}\right)\times \left(\text{B}\right)\right)$
2014	60,000	1/5	12,000
2015	60,000	1/5	12,000
2016	60,000	1/5	12,000
2017	60,000	1/5	12,000
2018	60,000	1/5	12,000

Table (2)

Calculate the depreciable cost:

$\begin{array}{c}\text{Depreciable cost=Cost of the asset}-\text{Residual value}\\ \text{=\$64,000}-\$4,000\\ =\$60,000\end{array}$

Working Note 2: Prepare depreciation schedule under double-declining-balance (DDB) method for Company B.

Date	Double-Declining-Balance Depreciation  Rate	Book Value (Refer note) (in $)	Depreciation expense (in $)
	(A)	(B)	$\left(\left(\text{C}\right)=\left(\text{A}\right)\times \left(\text{B}\right)\right)$
2014	0.40	64,000	25,600
2015	0.40	38,400	15,360
2016	0.40	23,040	9,216
2017	0.40	13,824	5,530
2018	0.40	8,294	4,294

Table (3)

Note: Book value:

The amount of acquisition cost of less accumulated depreciation as on a particular date is referred to as book value.

Formula for book value:

$\text{Book value = }\left\{\begin{array}{l}\text{Acquisition cost–}\\ \text{Accumulated depreciation}\end{array}\right\}$

Accumulated depreciation:

The total amount of depreciation expense deducted, from the time asset acquired till date, as reported in the account as on a particular date, is referred to as accumulated depreciation.

Formula for accumulated depreciation:

$\text{Accumulated depreciation = }\left\{\begin{array}{l}\text{Depreciation expense in the previous years+}\\ \text{Depreciation in current year}\end{array}\right\}$

Determine the depreciation rate applied each year:

Useful life = 5 years

$\begin{array}{c}\text{Depreciation rate = }\frac{\text{100\%}}{\text{4 years}}\text{ × 2}\\ \text{= 40\%}\text{or }\text{.40}\end{array}$

Compute depreciation expense on 2018:

$\begin{array}{c}\text{Depreciation on 2018}=\left(\begin{array}{l}\text{Asset cost–Residual value}-\\ \text{Accumulated depreciation in 2018}\end{array}\right)\\ =\text{\$64,000–\$4,000–}\left(\text{\$25,600+\$15,360+\$9,216+\$5,530}\right)\\ =\$60,000-\$55,706\\ =\$4,294\end{array}$

Working note 3: Prepare depreciation schedule under units-of-production method for Company C.

Date	Depreciation per unit	Number of hours	Depreciation expense (in $)
	(A)	(B)	$\left(\left(\text{C}\right)=\left(\text{A}\right)\times \left(\text{B}\right)\right)$
2014	$0.30	50,000	15,000
2015	$0.30	55,000	16,500
2016	$0.30	40,000	12,000
2017	$0.30	44,000	13,200
2018	$0.30	31,000	3,300

Table (4)

Compute depreciation per unit:

$\begin{array}{c}\text{Depreciation per unit =}\frac{\text{ Asset cost – Residual value}}{\text{Estimated units of total production}}\\ \text{=}\frac{\text{\$64,000–\$4,000}}{200,000\text{hours}}\\ \text{=}\frac{\text{\$60,000}}{200,000\text{miles}}\\ \text{= \$0}\text{.30 per hour}\end{array}$

Compute depreciation expense on 2018:

$\begin{array}{c}\text{Depreciation on 2018}=\left(\begin{array}{l}\text{Asset cost–Residual value}-\\ \text{Accumulated depreciation in 2018}\end{array}\right)\\ =\text{\$64,000–\$4,000–}\left(\text{\$15,000+\$16,500+\$12,000+\$13,200}\right)\\ =\$60,000-\$56,700\\ =\$3,300\end{array}$

Conclusion

Hence, the company which will report the highest amount of net income for 2014 is Company A.

b.

To determine

Identify the company which will report the lowest amount of net income for 2016.

Explanation of Solution

Net Income

Net income is the sum total of all the revenues generated in a particular accounting period after deducting cost of goods sold and expenses and losses, such as rent expense, depreciation of that particular accounting period.

Identify the company which will report the lowest amount of net income for 2016:

Net Income for 2016
	Company A (in $)	Company B (in $)	Company C (in $)
Revenue	30,000	30,000	30,000
Less: Depreciation expense	12,000	9,216	12,000
Net Income	$18,000	$20,784	$18,000

Table (5)

Working Note 4: Prepare depreciation schedule under straight-line method for Company A.

Date	Depreciable Cost (in $)	Depreciation Rate	Depreciation expense (in $)
	(A)	(B)	$\left(\left(\text{C}\right)=\left(\text{A}\right)\times \left(\text{B}\right)\right)$
2014	60,000	1/5	12,000
2015	60,000	1/5	12,000
2016	60,000	1/5	12,000
2017	60,000	1/5	12,000
2018	60,000	1/5	12,000

Table (6)

Calculate the depreciable cost:

$\begin{array}{c}\text{Depreciable cost=Cost of the asset}-\text{Residual value}\\ \text{=\$64,000}-\$4,000\\ =\$60,000\end{array}$

Working Note 5: Prepare depreciation schedule under double-declining-balance (DDB) method for Company B.

Date	Double-Declining-Balance Depreciation Rate	Book Value (Refer note) (in $)	Depreciation expense (in $)
	(A)	(B)	$\left(\left(\text{C}\right)=\left(\text{A}\right)\times \left(\text{B}\right)\right)$
2014	0.40	64,000	25,600
2015	0.40	38,400	15,360
2016	0.40	23,040	9,216
2017	0.40	13,824	5,530
2018	0.40	8,294	4,294

Table (7)

Note:

Book value:

The amount of acquisition cost of less accumulated depreciation as on a particular date is referred to as book value.

Formula for book value:

$\text{Book value = }\left\{\begin{array}{l}\text{Acquisition cost–}\\ \text{Accumulated depreciation}\end{array}\right\}$

Accumulated depreciation:

The total amount of depreciation expense deducted, from the time asset acquired till date, as reported in the account as on a particular date, is referred to as accumulated depreciation.

Formula for accumulated depreciation:

$\text{Accumulated depreciation = }\left\{\begin{array}{l}\text{Depreciation expense in the previous years+}\\ \text{Depreciation in current year}\end{array}\right\}$

Determine the depreciation rate applied each year.

Useful life = 5 years

$\begin{array}{c}\text{Depreciation rate = }\frac{\text{100\%}}{\text{4 years}}\text{ × 2}\\ \text{= 40\%}\text{or }\text{.40}\end{array}$

Compute depreciation expense on 2018:

$\begin{array}{c}\text{Depreciation on 2018}=\left(\begin{array}{l}\text{Asset cost–Residual value}-\\ \text{Accumulated depreciation in 2018}\end{array}\right)\\ =\text{\$64,000–\$4,000–}\left(\text{\$25,600+\$15,360+\$9,216+\$5,530}\right)\\ =\$60,000-\$55,706\\ =\$4,294\end{array}$

Working Note 6: Prepare depreciation schedule under units-of-production method for Company C.

Date	Depreciation per unit	Number of hours	Depreciation expense (in $)
	(A)	(B)	$\left(\left(\text{C}\right)=\left(\text{A}\right)\times \left(\text{B}\right)\right)$
2014	$0.30	50,000	15,000
2015	$0.30	55,000	16,500
2016	$0.30	40,000	12,000
2017	$0.30	44,000	13,200
2018	$0.30	31,000	3,300

Table (8)

Compute depreciation per unit.

$\begin{array}{c}\text{Depreciation per unit =}\frac{\text{ Asset cost – Residual value}}{\text{Estimated units of total production}}\\ \text{=}\frac{\text{\$64,000–\$4,000}}{200,000\text{hours}}\\ \text{=}\frac{\text{\$60,000}}{200,000\text{miles}}\\ \text{= \$0}\text{.30 per hour}\end{array}$

Compute depreciation expense on 2018:

$\begin{array}{c}\text{Depreciation on 2018}=\left(\begin{array}{l}\text{Asset cost–Residual value}-\\ \text{Accumulated depreciation in 2018}\end{array}\right)\\ =\text{\$64,000–\$4,000–}\left(\text{\$15,000+\$16,500+\$12,000+\$13,200}\right)\\ =\$60,000-\$56,700\\ =\$3,300\end{array}$

Conclusion

Hence, the company which will report the lowest amount of net income for 2016 is Company A and Company C.

c.

To determine

Identify the company which will report the highest book value on the December 31, 2016, balance sheet.

Explanation of Solution

Book value:

The amount of acquisition cost of less accumulated depreciation as on a particular date is referred to as book value.

Formula for book value:

$\text{Book value = }\left\{\begin{array}{l}\text{Acquisition cost–}\\ \text{Accumulated depreciation}\end{array}\right\}$

Identify the company which will report the highest book value on the December 31, 2016, balance sheet:

Book value on December 31, 2016
	Company A (in $)	Company B (in $)	Company C (in $)
Cost	64,000	64,000	64,000
Less: Accumulated depreciation	34,800	50,176	42,050
Book value	$29,200	$13,824	$21,950

Table (9)

Working Note 7: Prepare depreciation schedule under straight-line method for Company A.

Date	Depreciable Cost (in $)	Depreciation Rate	Depreciation expense (in $)	Accumulated depreciation (in $)
	(A)	(B)	$\left(\left(\text{C}\right)=\left(\text{A}\right)\times \left(\text{B}\right)\right)$
2014	60,000	1/5	12,000	12,000
2015	60,000	1/5	12,000	24,000
2016	60,000	1/5	12,000	36,000

Table (10)

Calculate the depreciable cost:

$\begin{array}{c}\text{Depreciable cost=Cost of the asset}-\text{Residual value}\\ \text{=\$64,000}-\$4,000\\ =\$60,000\end{array}$

Working Note 8: Prepare depreciation schedule under double-declining-balance (DDB) method for Company B.

Date	Double-Declining-Balance Depreciation Rate	Book Value (Refer note) (in $)	Depreciation expense (in $)$\left(\left(\text{C}\right)=\left(\text{A}\right)\times \left(\text{B}\right)\right)$	Accumulated depreciation (in $)
	(A)	(B)
2014	0.40	64,000	25,600	25,600
2015	0.40	38,400	15,360	40,960
2016	0.40	23,040	9,216	50,176

Table (11)

Note:

Book value:

The amount of acquisition cost of less accumulated depreciation as on a particular date is referred to as book value.

Formula for book value:

$\text{Book value = }\left\{\begin{array}{l}\text{Acquisition cost–}\\ \text{Accumulated depreciation}\end{array}\right\}$

Accumulated depreciation:

The total amount of depreciation expense deducted, from the time asset acquired till date, as reported in the account as on a particular date, is referred to as accumulated depreciation.

Formula for accumulated depreciation:

$\text{Accumulated depreciation = }\left\{\begin{array}{l}\text{Depreciation expense in the previous years+}\\ \text{Depreciation in current year}\end{array}\right\}$

Determine the depreciation rate applied each year.

Useful life = 5 years

$\begin{array}{c}\text{Depreciation rate = }\frac{\text{100\%}}{\text{4 years}}\text{ × 2}\\ \text{= 40\%}\text{or }\text{.40}\end{array}$

Working Note 9: Prepare depreciation schedule under units-of-production method for Company C.

Date	Depreciation per unit (A)	Number of hours (B)	Depreciation expense (in $)$\left(\left(\text{C}\right)=\left(\text{A}\right)\times \left(\text{B}\right)\right)$	Accumulated depreciation (in $)
2014	$0.30	50,000	15,000	15,000
2015	$0.30	55,000	16,500	31,500
2016	$0.30	40,000	12,000	43,500

Table (12)

Compute depreciation per unit:

$\begin{array}{c}\text{Depreciation per unit =}\frac{\text{ Asset cost – Residual value}}{\text{Estimated units of total production}}\\ \text{=}\frac{\text{\$64,000–\$4,000}}{200,000\text{hours}}\\ \text{=}\frac{\text{\$60,000}}{200,000\text{miles}}\\ \text{= \$0}\text{.30 per hour}\end{array}$

Conclusion

Hence, the company which will report the highest book value on the December 31, 2016, balance sheet is Company A.

d.

To determine

Identify the company which will report the highest amount of retained earnings on the December 31, 2017, balance sheet.

Explanation of Solution

Retained earnings:

The retained earnings statement is that financial statement which shows the amount of net income which is actually retained by the Company on a particular date. These earnings can be utilized by the Company for the reinvestment and to pay its debts.

Table (13)

Hence, the company which will report the highest amount of retained earnings on the December 31, 2017, balance sheet is Company A. However, the retained earnings for all the companies will be the same at the end of the asset’s five-year life, as the total depreciation over the five year period is the same for all the three companies.

e.

To determine

Identify the company which will report the lowest amount of cash flow from operating activities on the 2016 statement of cash flows.

Explanation of Solution

Statement of cash flows:

This statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period.

Cash flows from operating activities:

These refer to the cash received or cash paid in day-to-day operating activities of a company.  In this direct method, cash flow from operating activities is computed by using all cash receipts and cash payments during the year.

Depreciation expense is not a cash outflow item. If the income tax is not considered, all the three companies will report the same amount of cash flow from operating activities on the 2016 statement of cash flows.