Question

Three different companies each purchased trucks on January 1, 2018, for $76,000. Each truck was expected to last four years or 250,000 miles. Salvage value was estimated to be $6,000. All three trucks were driven 81,000 miles in 2018, 55,000 miles in 2019, 46,000 miles in 2020, and 71,000 miles in 2021. Each of the three companies earned $65,000 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. Calculate the net income for 2021?
b. Which company will report the lowest amount of net income for 2021?
c. Calculate the book value on the December 31, 2020, balance sheet?
d. Which company will report the highest book value on the December 31, 2020, balance sheet?
e. Calculate the retained earnings on the December 31, 2021, balance sheet?
f. Which company will report the highest amount of retained earnings on the December 31, 2021, balance sheet?

Answer 1

Answer:

a) 2021:                           Company A    Company B    Company C

Sales Revenue                  $65,000         $65,000         $65,000

Depreciation                         17,500             3,500              19,880

Net Income                       $47,500            61,500           $45,120

b) Company C.

c) Book Value on December 31, 2020 Balance Sheet:

                                           Company A    Company B    Company C

Truck                                     $76,000         $76,000         $76,000

Accumulated Depreciation $52,500         $66,500         $50,960

Book value                           $23,500         $9,500           $25,040

d) Company reporting the highest book value on December 31, 2020:

Company C.

e) Retained Earnings:

                                       Company A    Company B    Company C

2018:

Net Income                       $47,500            27,000         $42,320

2019:

Net Income                       $47,500            46,000          $49,600

2020:

Net Income                        $47,500            55,500          $52,120

2021:

Net Income                       $47,500            61,500           $45,120

Retained earnings         $190,000        $190,000          $189,160

f) Companies A and B will report the highest amount of retained earnings because C's units of production did not tally to 250,000.

Explanation:

Cost of Truck = $76,000

Lifespan = 4 years or 250,000 miles

Salvage value = $6,000

Depreciable amount = $70,000 ($76,000 - $6,000)

Straight-line rate = $17,500 ($70,000/4) or 25% (100/4) per year

Double-declining balance rate = 50% (100/4 * 2) on the book balance

Units of production  rate = $0.28 ($70,000/250,000) per unit

Income Statement for the three companies:

                                        Company A    Company B    Company C

2018:

Sales Revenue                  $65,000         $65,000         $65,000

Depreciation                         17,500            38,000           22,680

Net Income                       $47,500            27,000         $42,320

2019:

Sales Revenue                  $65,000         $65,000         $65,000

Depreciation                         17,500            19,000             15,400

Net Income                       $47,500            46,000          $49,600

2020:

Sales Revenue                   $65,000         $65,000         $65,000

Depreciation                         17,500              9,500             12,880

Net Income                        $47,500            55,500          $52,120

2021:

Sales Revenue                  $65,000         $65,000         $65,000

Depreciation                         17,500             3,500              19,880

Net Income                       $47,500            61,500           $45,120

Accumulated Depreciation:

                                            Company A    Company B    Company C

Depreciation  2018                  17,500            38,000            22,680

Depreciation  2019                  17,500            19,000             15,400

Accumulated Depreciation  $35,000         $57,000          $38,080

Depreciation 2020                  17,500             9,500             12,880

Accumulated Depreciation $52,500         $66,500         $50,960

Depreciation 2021                  17,500              3,500             19,880

Accumulated Depreciation $70,000         $70,000          $70,840