Name: Solution 07/25/04

Problem 9c: Reporting Property, Plant, & Equipment

Jaime Simes founded Simes Products on September 1. During its first year the company had sales of $310,000, a cost of goods sold of $180,000, and operating expenses (not including depreciation) of $70,000. The company estimates its income taxes expense will be approximately 35% of income before taxes.

The company's equipment, all of which was purchased on September 1, cost $130,000, with an estimated residual or salvage value of $10,000, and a useful life of five years.

You have been asked by Jaime Simes to assist in deciding which depreciation method to use in accounting for the Simes Products' activity for its first fiscal year ended August 31.

1.Calculate the Simes Products' net income using the straight-line and double-declining-balance depreciation methods. Round all calculations to the nearest dollar.

Simes Products
Income Statements
For the Year Ended August 31
Straight-
Line / Double-
Declining-

Balance

Sales / $310,000 / $310,000
Cost of Goods Sold / $180,000 / $180,000
Gross Profit / $130,000 / $130,000
Operating Expenses
Other than depreciation / $70,000 / $70,000
Depreciation Expense / $24,000 / $52,000
Total Operating Expenses / $94,000 / $122,000
Income Before Taxes / $36,000 / $8,000
Income Taxes Expense / $12,600 / $2,800
Net Income / $23,400 / $5,200

2.How much more cash would Simes Products have available on August 31 if it uses the double-declining-balance depreciation method? Hint: The correct answer is not $18,200. $9,800.

The CASH difference between depreciation methods is due to the income taxes payments difference = $12,600 - $2,800 = $9,800.

3.Determine the following for Simes Products:

Straight-
line / Double-
Declining-
Balance
Equipment cost reported on the August 31 balance sheet at the end of its first year / $130,000 / $130,000
Equipment accumulated depreciation dollar amount reported on the August 31 balance sheet at the end of its first year / $24,000 / $52,000
Equipment cost reported on the August 31 balance sheet at the end of its second year / $130,000 / $130,000
Equipment accumulated depreciation dollar amount reported on the August 31 balance sheet at the end of its second year / $48,000 / $83,200

Straight-line depreciation per year = (cost – residual value) / useful life.

Straight-line depreciation per year = ($130,000 - $10,000) / 5 = $24,000.

Straight-line accumulated depreciation after year 1 = $24,000.

Straight-line accumulated depreciation after year 2 = $24,000 + $24,000 = $48,000.

Double-declining-balance depreciation in year 1 = (2 x 1/useful life) x (cost – accumulated depreciation).

Double-declining-balance depreciation in year 1 = (2 x 1/5) x ($130,000 - $0) = $52,000.

Double-declining-balance depreciation in year 2 = (2 x 1/5) x ($130,000 - $52,000) = $31,200.

Double-declining-balance depreciation after year 1 = $52,000.

Double-declining-balance depreciation after year 2 = $52,000 + $31,200 = $83,200.