DecisionMaking Across the Organization Pinson Company and Es

Decision-Making Across the Organization Pinson Company and Estes Company are two proprietorships that are similar in many respects. One difference is that Pinson Company uses the straight-line method and Estes Company uses the declining-balance method at double the straight-line rate. On January 2 2015, both companies acquired the depreciable assets shown below Usetul Lite Asset Buildings Equipment oS $360,000 130,000 Salvage Value $20,000 10,000 40 years ars Including the appropriate depreciation charges, annual net income for the companies in the years 2015, 2016, and 2017 and total income for the 3 years were as follows 2017 90,000 85,000 Total $262,400 229,000 2015 Pinson Company Estes Company $84,000 68,000 2016 $88,400 76,000 At December 31, 2017, the balance sheets of the two companies are similar except that Estes Company has more cash than Pinson Company Lynda Peace is interested in buying one of the companies. She comes to you for advice Instructions With the class divided into groups, answer the following. Determine the annual and total depreciation recorded by each company during the 3 years. Assuming that Estes Company also uses the straight-line method of depreciation instead of the declining-balance method as in (a), prepare comparative income data for the 3 years Which company should Lynda Peace buy? Why?

Solution

Answers

----Building

A

Cost

$          360,000.00

B

Residual Value

$            20,000.00

C=A – B

Depreciable base

$          340,000.00

D

Life [in years]

40

E=C/D

Annual SLM depreciation

$              8,500.00

F=E/C

SLM Rate

2.50%

G=F x 2

DDB Rate

5.00%

---Double Declining depreciation for Building

Year

Beginning Book Value

Depreciation rate

Depreciation expense

Ending Book Value

Accumulated Depreciation

2015

$            360,000

5.00%

$          18,000

$       342,000

$        18,000

2016

$            342,000

5.00%

$          17,100

$       324,900

$        35,100

2017

$            324,900

5.00%

$          16,245

$       308,655

$        51,345

---Equipment

A

Cost

$          130,000.00

B

Residual Value

$            10,000.00

C=A – B

Depreciable base

$          120,000.00

D

Life [in years]

10

E=C/D

Annual SLM depreciation

$            12,000.00

F=E/C

SLM Rate

10.00%

G=F x 2

DDB Rate

20.00%

---Double declining depreciation for Equipment

Year

Beginning Book Value

Depreciation rate

Depreciation expense

Ending Book Value

Accumulated Depreciation

1

$            130,000

20.00%

$          26,000

$       104,000

$        26,000

2

$            104,000

20.00%

$          20,800

$          83,200

$        46,800

3

$              83,200

20.00%

$          16,640

$          66,560

$        63,440

Pinson Company

Estes Company

Building Depreciation expense

Equipment depreciation expense

Total Depreciation expense

Building Depreciation expense

Equipment depreciation expense

Total Depreciation expense

2015

$                8,500

$                12,000

$          20,500

$          18,000

$        26,000

$              44,000

2016

$                8,500

$                12,000

$          20,500

$          17,100

$        20,800

$              37,900

2017

$                8,500

$                12,000

$          20,500

$          16,245

$        16,640

$              32,885

Total

$              25,500

$                36,000

$          61,500

$          51,345

$        63,440

$            114,785

Annual & Total Depreciation

Pinson Company

Estes Company

2015

$              20,500

$                                                   44,000

2016

$              20,500

$                                                   37,900

2017

$              20,500

$                                                   32,885

---Working for converting Estes company’s Net Income as per Straight Line Method

Year

2015

2016

2017

Net Income after depreciation

$              68,000

$                76,000

$          85,000

Add: DDB Depreciation expense

$              44,000

$                37,900

$          32,885

Net Income before depreciation expense

$            112,000

$              113,900

$        117,885

Less: Depreciation as per SLM

$              20,500

$                20,500

$          20,500

Net Income to be considered

$              91,500

$                93,400

$          97,385

----Comparative Income Statement

Year

Pinson Company Net Income

Estes Company Net Income

2015

$              84,000

$                91,500

2016

$              88,400

$                93,400

2017

$              90,000

$                97,385

Linda Peace should buy “ESTES COMPANY”.

This is because, even though Estes Company’s Net Income are LOWER than Pinson’s company, the Net Income after eliminating the effect of Double declining method depreciation and using Straight Line depreciation, the Net Income of Estes is MORE than that of Pinson Company.

A	Cost	$          360,000.00
B	Residual Value	$            20,000.00
C=A – B	Depreciable base	$          340,000.00
D	Life [in years]	40
E=C/D	Annual SLM depreciation	$              8,500.00
F=E/C	SLM Rate	2.50%
G=F x 2	DDB Rate	5.00%